Price rigidity refers to a situation where economic agents do not adjust prices immediately despite changes in cost or demand patterns. Since price rigidity is one of the determinants of the effects of monetary policy, it is necessary to collect information on price rigidity in the economy through firm-level surveys on firm price-setting behavior in order to predict the effects of monetary policy accurately. Against this backdrop, firm-level surveys have been conducted by several central banks, including the Bank of Korea, which has carried out a firm-level survey every four years since 2008. This paper examines the characteristics of the price-setting behavior of Korean firms and analyzes the relationship between firm characteristics and price rigidity, based on the results of the survey conducted for three months between November 2020 and January 2021. In addition, we suggest the characteristics of inflation expectations of Korean firms shown in the survey in line with growing awareness that understanding the inflation expectations of firms, which are price-setters, is important for improving monetary policy efficiency.

Firms’ price-setting behavior shown in the survey can be summarized into the following three characteristics: first, price rigidity has weakened compared to the 2016 survey; second, heterogeneity in firms’ price rigidities has widened relative to 2016; and third, the size of a one-time price change of a firm tends to be smaller as the firm adjusts prices more frequently. Also, prices are usually adjusted more slowly when the overall prices increase than when they decrease. The Logit regression results show that price rigidity is weaker in the manufacturing industries than in the non-manufacturing industries, SMEs rather than large companies, firms with a higher share of loyal customers and long-term contracts, and firms with more consumer and corporate customers than public institution customers.

The survey indicates two facts about firms’ inflation expectations: first, firms expected inflation to average 10.6% over the next year, which far exceeds the inflation target of 2.0%; and second, firms perceived inflation in the past year as 9.7% on average, implying that firm’s inflation perceptions tend to be much higher than the actual rate. The firms’ high inflation expectations seem to be caused by the following factors: a) an increase in firms’ perceived price-level due to rising commodity prices during the pandemic (b) the weak role of macroeconomic indicators in firms’ business decision-making (c) firms’ low awareness of inflation targeting.

These results provide a few implications regarding the effects of monetary policy: The overall effects of monetary policy decrease as price rigidity weakens. However, due to the expansion of heterogeneous price ridigities among firms, the effect of monetary policy on prices would weaken further while the real effect (on the output gap) would decrease less and persist longer. Also, monetary policy could have stronger effects in industries or firms with greater price rigidity. Meanwhile, this survey results suggest that the central bank needs to communicate more actively with firms in order to improve their awareness of inflation targeting.