Formal sector price discoveries: preliminary results from a developing country

We present preliminary results of 1086 structured interviews about price setting behavior of the formal firms in the manufacturing and services sector of Pakistan. Our key discoveries are that frequency of price change is considerably high in Pakistan, lowering the real impact of monetary policy. Price rigidity is explained mainly by firms caring about relative prices and the persistence of a given shock. The exchange rate and cost shocks are more important than financial and demand shocks for both setting prices and also the readiness with which these pass-through to the economy. Large firms change prices more frequently compared to smaller firms. Formal sector firms, especially medium sized firms, interact more with informal sector firms through the demand and supply channels. Formal firms highly connected with the informal sector have lower frequency of price changes. Formal sector firms hold lack of taxes and compliance with tax regime, i.e. enforcement, as the main reasons for the existence of the informal sector.