11 July 2011

New Working Paper on price setting among Icelandic firms

Working paper no. 54, “Price setting in turbulent times: Survey evidence from Icelandic firms”, by Thorvardur Tjörvi Ólafsson, Ásgerdur Pétursdóttir and Karen Á. Vignisdóttir has been published.

The paper presents survey evidence on Icelandic firms’ price setting behaviour and discusses various monetary policy implications arising from the results. The paper aims to make two contributions to the fast-growing price setting literature. First, it studies price setting in an advanced economy within a more turbulent macroeconomic environment than has previously been done. Second, it examines the nexus between price setting and exchange rate movements, basing the analysis on a categorisation of firms by their direct exposure to exchange rate changes. The findings highlight the challenges faced by monetary policy in Iceland, as evidence is found of high and asymmetric exchange rate pass-through, widespread use of price indexation, a high degree of backward-looking pricing behaviour, and limited confidence in the Central Bank’s ability to deliver price stability, all of which tend to make inflation control more difficult and limit the smooth transmission of monetary policy through management of firms’ expectations.

See the Bank’s Working Papers here: Working Papers