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title: “Surprises in Prices: Facts, Determinants, and Effects”

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date: “2023-09-01”

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# publication: Swiss Journal of Economics and Statistics (2020) 156:13

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abstract: “This paper examines the determinants of firms' price expectation errors and their effects on both price setting and inflation dynamics. The analysis differentiates between two types of surprises: those prompting price adjustments despite the absence of anticipated changes (termed flexibility-inducing) and those failing to induce price adjustments despite expectations of changes (termed rigidity-inducing). Survey data for Swiss firms reveals remarkable frequencies and cyclicality in price surprises, with flexibility-inducing surprises dominating: More than half of all price changes materialize as unanticipated adjustments from the prior quarter. Surprise responsiveness to news and predictability through firm-specific factors, profitability and competitive conditions, in particular, challenge the full-information rational expectations hypothesis. At the micro level, firms’ pricing decisions display significant and asymmetric responses to surprise shocks. At the macro level, the frequency of flexibility-inducing surprises emerges as a stronger driver of inflation variations than the frequency of anticipated price changes.”

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