Determinants of Price Rigidity and Flexibility: Some Survey Evidence for the Pakistan.

Abstract

The objective of the study is to estimate the determinants of price stickiness or flexibility. Data is collected through structured questionnaire from 342 firms, which are selected through stratified random sampling technique from the Industrial Estate of Khyber Pakhtunkhwa. To estimate the determinants of price flexibility/rigidity, models are estimated through ordinary least squares technique and binary logistic technique. The most important factors for price stickiness are implicit/explicit price contracts and minimum price volatility. Imperfect competitive market structure, number of regular customers, backward-looking behavior, and credibility of central bank and size of the firm are important determinants of price rigidity. While economic literacy and information set regarding expected inflation make the prices flexible. Study recommend that monetary policy of Pakistan should use other transmission channels of money supply instead of traditional channel, because it is found that the degree of price rigidity is low in Pakistan. Keywords: Price Rigidity, Price Flexibility, Price Contract, Frequency of Price Change.