The Milton Friedman Institute for Research in Economics

Recent analyses of transaction-level datasets have generated new stylized facts on price setting and greatly in‡uenced the empirical macroeconomics literature. This work has uncovered marked heterogeneity in price stickiness, demonstrated that even nonzero price changes do not fully "pass through" cost shocks, and o¤ered evidence of synchronization in the timing of price changes. Further, intra…rm prices have been shown to di¤er from arm’s length prices in each of these characteristics. This paper develops a state-dependent model of intermediate goods pricing, which allows for arm’s length and intra…rm transactions, and is capable of generating these empirical pricing patterns. [email protected]. I thank Gita Gopinath, Elhanan Helpman, Ken Rogo¤, Ariel Burstein, Steve Davis, Uli Doraszelski, Dan Frisch, Oleg Itskhoki, Virgiliu Midrigan, Emi Nakamura, Roberto Rigobon, Jon Steinsson, and Aleh Tsyvinski for very helpful comments and suggestions.