Price-setting behaviour, sectoral inflation dynamics and monetary policy

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This dissertation examines Switzerland’s consumer prices through both micro and macro perspectives. Chapter 1 presents a descriptive analysis of firms’ price-setting behavior, revealing significant heterogeneity among price setters, particularly in the frequency of price changes, while the magnitude of these changes remains relatively stable. Chapter 2 delves deeper into the timing of price changes and evaluates the relevance of existing price-setting models. The empirical results align with recent menu-cost models that highlight the importance of time-varying heterogeneity and temporary price reductions. However, these findings do not reconcile the micro and macro facts. The subsequent chapters draw on recent theoretical contributions that focus on rational inattention, idiosyncratic disturbances, and sectoral heterogeneity. Chapter 3 employs a factor-augmented vector autoregression to differentiate disaggregate price fluctuations into idiosyncratic disturbances and a common component. The analysis confirms that sectoral responses to macroeconomic shocks exhibit considerable heterogeneity, consistent with the micro findings. Nevertheless, the implications of rational inattention do not fully align with the empirical data. Additionally, evidence suggests that the sluggish inflation response may be influenced more by the cost channel of monetary policy than by price stickiness.