Theoretical research undertaken over the last decades showed that the nature of nominal rigidities plays a key role in determining the effects of different shocks on the economy. This research has made clear that a thorough understanding of the extent and causes of the sluggish adjustment of nominal prices is crucial to the design and conduct of monetary policy. This book presents the main results of a research program undertaken by the Eurosystem central banks on price setting decisions by firms in the euro area. Its objective is to deepen our understanding of the behavioral mechanisms drivin ... More

Theoretical research undertaken over the last decades showed that the nature of nominal rigidities plays a key role in determining the effects of different shocks on the economy. This research has made clear that a thorough understanding of the extent and causes of the sluggish adjustment of nominal prices is crucial to the design and conduct of monetary policy. This book presents the main results of a research program undertaken by the Eurosystem central banks on price setting decisions by firms in the euro area. Its objective is to deepen our understanding of the behavioral mechanisms driving agents' pricing decisions, adopting a methodological approach—asking firms directly about how they set the price of their output (their pricing strategies) and why (the rationale of these strategies)—that is particularly well suited for the purpose at hand. The book also compares results for the euro area to similar analyses for other countries and summarizes the main findings of studies based on individual quantitative micro data on consumer and producer prices carried out for most euro area countries. Finally, the book explores the monetary policy implications of the main findings.