Price-setting and economic slack: Evidence from firm-level survey data

Economic slack plays an important role for inflation dynamics in conventional macroeconomic models. Some have argued that this relationship, known as the Phillips curve, has broken down in recent years. However, due to the endogenous response of monetary policy, identification of the aggregate Phillips curve is fraught with uncertainty. To deal with some of these issues, this paper relies on a novel survey data set for firms in the retail trade sector in Sweden to explore the relationship between firms price-setting and firm-level measures of economic slack, namely firms' perception of their sales situation, profitability, labor shortages and goods in stock. The results suggest that firms' selling prices are more likely to increase if they perceive the sales situation to be good, rather than satisfactory or poor, and if they expect aggregate inflation to be rising. Firms' assessment of their profitability, labor shortages or goods in stock are however only weakly correlated with selling prices, if at all.