Price rigidity in the euro area - An assessment

The study on price stickiness examined nominal rigidities in the euro area and their importance for the functioning of markets. The study examined nominal rigidities in the euro area and their importance for the functioning of markets. It analysed the price setting behaviour of firms at the micro-level, developed several indicators to measure the degree of producer and consumer price rigidity at sector and product level and examined the various factors affecting consumer and producer price rigidity. One of the main findings of the study is that economic adjustment to nominal shocks depends both on the frequency of price changes and on the degree of price rigidity (prices are defined as being rigid in the study if they less then fully adjust to a change in demand or costs). The study also distinguished between intrinsic price rigidity (prices only adjust partially to changes in demand and costs that have significant effects on the optimal price) and extrinsic price rigidity (prices do not adjust because demand and costs are stable and the optimal price does not vary a lot). Making this distinction leads to important conclusions concerning the degree of price rigidity for certain product categories and has important policy implications.