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Bachmann, Rüdiger
Born, Benjamin
Elstner, Steffen
Grimme, Christian
Year of Publication: 
Series/Report no.: 
Arbeitspapier, Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung 01/2013
Does time-varying business volatility affect the price setting of firms and thus the transmission of monetary policy into the real economy? To address this question, we estimate from the firm-level micro data of the German IFO Business Climate Survey the impact of idiosyncratic volatility on the price setting behavior of firms. In a second step, we use a calibrated New Keynesian business cycle model to gauge the effects of time-varying volatility on the transmission of monetary policy to output. Our results are twofold. Heightened business volatility increases the probability of a price change, though the effect is small: the tripling of volatility during the recession of 08/09 caused the average quarterly likelihood of a price change to increase from 31.6% to 32.3%. Second, the effects of this increase in volatility on monetary policy are also small; the initial effect of a 25 basis point monetary policy shock to output declines from 0.347% to 0.341%.
survey data
time-varying volatility
price setting
New Keynesian model
monetary policy
Document Type: 
Working Paper

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