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Macroeconomic Dynamics with Product Market Frictions

Project description

Studying the impact and importance of product market friction

Current studies on micro- and macroeconomic shocks to supply and demand chains, whether in product markets or firm prices, have produced mixed and complex results that lack practical applications due to product market frictions. These frictions can reduce demand relocation and affect company incentives during price settings, causing shocks to propagate through both demand and prices. Funded by the European Research Council, the MACROPMF project aims to study the overall effects of product market friction and its impact on macroeconomic dynamics. The ultimate goal of the project is to integrate both micro- and macroeconomics in theory and empirically, enabling a better understanding of the impact of economic shocks on supply and demand chains, as well as firm prices.


The transmission of microeconomic and macroeconomic shocks to firms' price and demand in product markets is the cornerstone of a large volume of macroeconomic literature. Product market frictions, by reducing the ability of demand to relocate across different suppliers, affect firms' incentives when setting prices, and therefore the pass-through of shocks to both demand and prices.
In this project we plan to study the implications of product market frictions for firm level price and demand dynamics, as well as for macroeconomic dynamics. The aim is to integrate micro and macro economics, both theoretically and empirically, to a greater extent than is currently done in the literature.

We will apply our tools to two main areas of interest. First, we will study how product market frictions affect the optimal pricing decision of firms, and the relocation of consumers across different suppliers. We will provide novel empirical microeconomic evidence on the relationship between price and consumer dynamics. We will build a rich but yet tractable model where product market frictions give rise to firm pricing with customer markets. The aim is to use observable statistics from the micro data to estimate the key parameters of the model and quantify the relevance of the product market frictions for firm pricing and demand dynamics.

Second, we will explore the importance of product market frictions for macroeconomic dynamics. We will apply our quantified model of price and consumer dynamics to areas of macroeconomics where we expect our methodology and empirical analysis to be more relevant, both because of the types of questions addressed and because of a direct relationship with the mechanism. In particular we will focus on the role of product market frictions for business cycle fluctuations and international trade.

Host institution

Istituto Einaudi per l'Economia e la Finanza
Net EU contribution
€ 1 192 000,00
via sallustiana 62
00187 ROMA

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Centro (IT) Lazio Roma
Activity type
Research Organisations
Total cost
€ 1 192 000,00

Beneficiaries (1)