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Pricing Behavior and the Response of Hours to Productivity Shocks


  • We thank Susanto Basu, Mark Bils, Jordi Galí, Saul Lach, Stefano Neri, Valerie Ramey, Plutarkos Sakellaris, Alessandro Secchi, Chad Syverson, Michael Woodford, and an anonymous referee for helpful comments and suggestions at different stages of our research. We are also grateful to seminar participants at the Bank of Italy, the University “La Sapienza,” Humboldt University, the CEPR-Banco de Espana-ECB Conference on “Prices, Productivity and Growth,” the NBER Summer Institute, the CEPR-EABCN-Bank of Finland Workshop on “Productivity and the Business Cycle,” and the EEA Congress for useful discussions and suggestions. Of course, responsibility for any errors is entirely our own. The views in this paper are those of the authors and do not necessarily reflect those of the Bank of Italy.


Recent contributions have suggested that technology shocks have a negative impact on hours, contrary to the prediction of standard flexible-price models of the business cycle. Some authors have interpreted this finding as evidence in favor of sticky-price models, while others have either extended flexible-price models or disputed the empirical finding itself. In this paper, we estimate a variety of alternative total factor productivity measures for a representative sample of Italian manufacturing firms and on average find a negative effect of productivity shocks on hours growth. More interestingly, using the reported frequency of price reviews, we show that the contractionary effect is stronger for firms with stickier prices and weaker or not significant for firms with more flexible prices. Price stickiness remains a crucial factor in shaping the response of hours after controlling for product storability or market power.