Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/299355 
Year of Publication: 
2024
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2024-20
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We study how the interaction of market power and nominal price rigidity influences inflation dynamics. We formulate a tractable model of oligopolistic competition and sticky prices and derive closed-form expressions for the pass-through of idiosyncratic and common cost shocks to firms' prices. Using unpublished micro data for Canadian wholesale firms, we estimate that the pass-through of idiosyncratic costs is incomplete at 70% and independent of the degree of sector-price-stickiness. The pass-through of common costs declines with price stickiness, from nearly complete in flexible-price sectors to below 70% in sectors with the stickiest prices. An increase in the degree of sector or firm market power reduces the pass-through of both types of cost shocks. These estimates imply a degree of strategic complementarity that lowers the slope of the New Keynesian Phillips curve by 30% in a one-sector model and by 74% in a multi-sector model.
Subjects: 
Firm dynamics
Inflation and prices
Market structure and pricing
Monetary policy transmission
JEL: 
D43
E31
L13
L81
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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