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Price-Setting Behavior with Menu Costs – Experimental Evidence

We experimentally test the price-setting behavior of firms in the Rotemberg (1982) model in order to explain puzzles in the New Keynesian Phillips curve (NKPC). By constructing categories and a quantitative measure that compare behavior with optimum we find heterogeneous price-setting behavior by degree of information acquired about the future. Subjects rarely use past information, but overweight their own past price. We study the impact of heterogeneous price-setting behavior on estimated theoretically derived and hybrid Phillips curves. We find support for features of both NKPCs in our findings at the micro level. But the hybrid NKPC has a superior fit.