Price Setting of Firms under Cost Uncertainty

Author Name MORIKAWA Masayuki (President and CRO, RIETI)
Creation Date/NO. June 2023 23-E-040
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This study documents firms’ input and output price uncertainty over the past 20 years, using made-to-order aggregate data from the Short-Term Economic Survey of Enterprises in Japan (Tankan Survey). The results show that input and output price uncertainty increased markedly in the second half of 2008 when the Global Financial Crisis hit the economy, but subsequently, price uncertainty remained low, even during the COVID-19 pandemic. Output price uncertainty is strongly associated with input price uncertainty, and this relationship is more pronounced than its relationship with demand uncertainty. Input price uncertainty suppresses firms’ output prices, suggesting that uncertainty weakens price pass-through.

This is the English version of the Japanese Discussion Paper (22-J-019) with some additional information and changes.