Price-Setting Behavior of Korean Firms†

Abstract

This paper investigates a pattern of price revision by firms in Korea and sheds light on the cause of price stickiness by providing reliable statistical estimates for calibration of the parameters of the widely-used macro-models. Based on firm-level survey data and using a probit model, we identify the firm characteristics or market conditions that discourage firms from carrying out state-dependent price adjustment. We also estimate the factors driving firms to engage in state-dependent adjustment rather than wait until the next scheduled revision under three different shocks: demand, general cost and exchange rate shocks. We find a few interesting features, as follows. First, price revision by Korean firms tends to be time-dependent rather than state-dependent, with a sizable dispersion across sectors and firm sizes. Second, the pattern of price revision in Korea is not significantly different from that in selected advanced economies. Third, the reason why firms favor time-dependent price adjustments appears to be endogenous, accounted for by a number of market institution variables. Fourth, in response to shocks, Korean firms tend to wait until the next periodically scheduled revision rather than make a state-dependent price adjustment, unless marginal costs are affected significantly by the shock, and state-dependent revisions are often significantly delayed when they do occur.