The objective of the paper is to estimate the asymmetric response of firms for prices
to supply and demand shocks. Firms give an asymmetric response to supply and
demand shocks while setting at a price, and the prices are upward flexible and downward rigid
to changes in the determinants. Asymmetric response to the cost of raw material is highest.
Moreover, the seasonal factors have the lowest degree of asymmetric response. Firms give an
asymmetric response to different shocks, with respect to a price increase and decrease, and across
variables of demand-side and supply side. The central bank has to focus more on stabilization
in response to supply shocks than to demand shocks because supply shocks are found more
important than demand shocks to change the prices of firms. Measures should be taken to
prevent the possible effects of adverse supply shocks.
1-Nadeem Iqbal Assistant Professor, Department of Economics, University of Peshawar, KP, Pakistan.2-Amjad Amin Assistant Professor, Department of Economics, University of Peshawar, KP, Pakistan.3-Danish Wadood Alam Lecturer, Department of Economics, University of Peshawar, KP, Pakistan.
Supply and Demand Shocks, Asymmetric Response and Price Setting