price setting during low and high inflation evidence from mexico this paper provides new insight into the relationship between inflation and the setting of individual prices by examining a large data set of mexican consumer prices covering episodes of both low and high inflation when the annual rate of inflation is low below 10 15 the frequency of price changes comoves weakly with inflation because movements in the frequency of price decreases and increases partly offset each other in contrast the average magnitude of price changes correlates strongly with inflation because it is sensitive to movements in the relative shares of price increases and decreases when inflation rises beyond 10 15 few price decreases are observed and both the frequency and average magnitude are important determinants of inflation i show that a menu cost model with idiosyncratic technology shocks predicts the average frequency and magnitude of price changes well over a range of inflation similar to that experienced by mexico

the behavior of prices and inflation an empirical analysis of disaggregat price data this paper analyzes the effects of inflation on the dispersion of prices as well as other aspects of price behavior using disaggregated data on prices of foodstuffs in israel during 1978 84 we find that the effect of expected inflation on intramarket price variability is stronger than the effect of unexpected inflation we show that even in times of high inflation price quotations are not trivially short and price changes are not synchronized across firms these facts taken together confirm that there is some staggering in the setting of prices we find that the distribution of real prices is far from being uniform as many menu cost based models assume or conclude in fact as inflation increases to very high levels this distribution is not even symmetric when the annual inflation rate reaches 130 percent there are equal chances of finding real prices above or below the market average but upward deviations in the real price are further away from zero than downward ones furthermore as the annu

on the fisher konieczny index of price changes synchronization this note provides a structural interpretation for the index of price changes synchronization proposed by fisher and konieczny 2000 economics letters 68 271 277 and shows that it can be used to test the hypothesis of uniform

identifying price reviews by firms an econometric approach price reviews are a potentially costly activity a significant fraction of unchanged prices may stem from firms not reviewing prices rather than from obstacles to changing prices per se such as menu costs in this paper we disentangle these two causes of price stickiness by estimating an inflated ordered probit model on a panel of french manufacturing firms the results point to a low frequency of price reviews suggestive of the relevance of information costs as a determinant of the observed price stickiness in view of the inattentive producers literature pointing that the source of price rigidity matters this is suggestive of a large real effect of monetary policy

simple solutions to the initial conditions problem in dynamic nonlinear panel data models with unobserved heterogeneity i study a simple widely applicable approach to handling the initial conditions problem in dynamic nonlinear unobserved effects models rather than attempting to obtain the joint distribution of all outcomes of the endogenous variables i propose finding the distribution conditional on the initial value and the observed history of strictly exogenous explanatory variables the approach is flexible and results in simple estimation strategies for at least three leading dynamic nonlinear models probit tobit and poisson regression i treat the general problem of estimating average partial effects and show that simple estimators exist for important special cases copyright 2005 john wiley sons ltd

evaluating microfoundations for aggregate price rigidities evidence from matched firm level data on product prices and unit labor cost a number of competing business cycle models have recently emerged all of which can explain why nominal shocks have real effects 1 although sharing a large number of common features a key difference between these models lies in the assumptions of how firms set prices and process information yet there exists very little direct micro evidence on the credibility of these assumptions this paper uses detailed data on product prices and unit labor cost merged at the firm level to evaluate competing sets of assumptions regarding firms price setting behavior thereby we provide firsthand evidence on the empirical relevance of the microfoundations of different dynamic stochastic general equilibrium dsge models

asymmetric wholesale pricing theory and evidence asymmetric pricing or asymmetric price adjustment is the phenomenon where prices rise more readily than they fall we offer and provide empirical support for a new theory of asymmetric pricing in wholesale prices wholesale prices may adjust asymmetrically in the small but symmetrically in the large when retailers face cost of price adjustment such retailers will not adjust prices for small changes in their costs manufacturers then see a region of inelastic demand where small wholesale price changes do not translate into commensurate retail price changes the implication is asymmetrica small wholesale price increase is more profitable because manufacturers will not lose customers from higher retail prices yet a small decrease is less profitable because it will not lower retail prices hence there is no extra revenue from greater sales for larger changes this asymmetry in the behavior of wholesale price vanishes as the price adjustment cost is compensated by the increase in retailers revenue resulting from correspondingly large retail price changes we present a formal economic model of a channel with forward looking retailers and cost of price adjustment test the derived propositions on the behavior of manufacturer prices using a large supermarket scanner data set and find that the results are consistent with the predictions of our theory we then discuss the implications for asymmetric pricing channels and cost of price adjustment literatures as well as public policy

costs demand and producer price changes abstract using business survey data we estimate an ordered probit model to explain the occurrence of producer price increases and decreases in the french manufacturing industry our results show that changes in intermediate input prices are the main driver of producer price changes changes in firms labor costs their production level or the producer price index of their industry contribute less to the occurrence of price changes moreover when they face a change in their costs firms adjust their prices upward more often and more rapidly than they do it downward especially when the shock is perceived as permanent

lumpy price adjustments a microeconometric analysis based on a reduced form state dependent pricing model with random thresholds we specify and estimate a nonlinear panel data model with an unobserved factor representing the common cost or demand components of the unobserved optimal price using this model we are able to assess the relative importance of common and idiosyncratic shocks in explaining the frequency and magnitude of price changes in the case of a wide variety of consumer products in belgium and france we find that the mean level and variability of the random thresholds are key for explaining differences across products in the frequency of price changes we also find that the idiosyncratic shocks represent the most important driver of the magnitude of price changes supplementary materials for this article are available online

why are prices sticky preliminary results from an interview study this paper reports preliminary results from a large research project on business pricing which is currently underway the idea is to use interviews with actual price setters to assess the validity of a dozen theories of price stickiness the rather unorthodox for economists methodology is defended the research design is described briefly and a few results based on the first 72 interviews out of a projected 200 are presented this sample suggests that the median firm changes its price annually and that price adjustments typically lag 3 4 months behind shocks to demand or cost this abstract was borrowed from another version of this item

prices rise faster than they fall output prices tend to respond faster to input increases than to decreases this tendency is found in more than two of every three markets examined it is found as frequently in producer goods markets as in consumer goods markets in both kinds of markets the asymmetric response to cost shocks is substantial and durable on average the immediate response to a positive cost shock is at least twice the response to a negative shock and that difference is sustained for at least five to eight months unlike past studies which documented similar asymmetries in selected markets gasoline agricultural products etc this one uses large samples of diverse products 77 consumer and 165 producer goods accordingly the results suggest a gap in an essential part of economic theory as a start on filling this gap the study finds no asymmetry in the resonse of an individual decision maker a supermarket chain to its costs but it finds above average asymmetry where a cost shock is filtered through a fragmented w

detrending and business cycle facts a user s guide this note argues that it is hardly the case that the profession is fully aware that the application of di erent filters to the data leads to di erent outcomes and that we have enough evidence to claim that these di erences are unimportant to evaluate the fit models to the data 1998 elsevier science b v all rights reserved jel classification b41 e32

heterogeneity in consumer price stickiness we examine heterogeneity in price stickiness using a large original set of individual price data collected at the retail level for the computation of the french consumer price index for that purpose we estimate at a very high level of disaggregation a piecewise constant hazard model as well as competing risks duration models that distinguish between price increases price decreases and product replacements the main findings are the following a at the product outlet type level the baseline hazard function of a price spell is nondecreasing b cross product and cross outlet type heterogeneity is pervasive both in the shape and the level of the hazard function as well as in the impact of covariates c there is strong evidence of state dependence especially for price increases d there is an asymmetry because determinants of price increases differ from those of price decreases

international evidence on the historical properties of business cycles we contrast properties of real quantities with those of price levels and stocks of money for ten countries over the last century although the magnitude of output fluctuations has varied across countries and periods relations among real quantities have been remarkably uniform properties of price levels however exhibit striking differences between periods inflation rates are more persistent after world war ii than before and price level fluctuations are typically procyclical before world war ii and countercyclical afterward fluctuations in money are less highly correlated with output in the postwar period but are no more persistent than in earlier periods jel e32 e31

menu costs and the neutrality of money a model of endogenous price adjustment under money growth is presented firms follow s s pricing policies and price revisions are imperfectly synchronized in the aggregate price stickiness disappears and money is neutral the connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated the results contrast with those obtained in models with exogenous fixed timing of price adjustment

detrending stylized facts and the business cycle the stylized facts of macroeconomic time series can be presented by fitting structural time series models within this framework we analyse the consequences of the widely used detrending technique popularised by hodrick and prescott 1980 it is shown that mechanical detrending based on the hodrick prescott filter can lead investigators to report spurious cyclical behaviour and this point is illustrated with empirical examples structural time series models also allow investigators to deal explicitly with seasonal and irregular movements that may distort estimated cyclical components finally the structural framework provides a basis for exposing the limitations of arima methodology and models based on a deterministic trend with a single break

can empirical demand models assist in con comparative reviews a case study in florida certificate of need con programs for new hospital construction are intended to foster the best selection among competing hospital applications given demands for hospital care in the community yet the merits of con depend in part on the quality of the comparative review process this article examines a case study in florida to illustrate the utility of empirical evaluations using patient choice models i estimate such models to show how patients would respond to a change in hospital choices by simulating the welfare effects of the proposed hospitals i can further predict how prices of hospital care differ by applicant results suggest that empirical analysis using data on patient choice of hospitals may better inform the review process at the same time however it may not give a unique ranking without additional analysis of the fixed costs of proposed services in the context of existing marketwide capacity

sticky prices in the euro area a summary of new micro evidence this paper summarises the vast evidence on micro price setting recently obtained for euro area countries we consider studies with micro data on consumer and producer prices as well as survey information the main findings are 1 prices in the euro area are sticky and stickier than in the us 2 downward price rigidity is only slightly more marked than upward price rigidity 3 heterogeneity and asymmetries are observed in price setting and 4 the relevance of theories that explain price stickiness such as implicit or explicit contracts marginal costs and coordination failure is confirmed whereas menu costs pricing thresholds and costly information explanations are judged much less relevant by firms jel c25 d40 e31

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

micro foundations for wage flexibility wage insurance at the firm level to what extent do firms insulate their workers wages from fluctuations in product markets which firm and worker attributes are associated with wage flexibility at the micro level we first rely on guiso pistaferri and schivardi 2005 to estimate dynamic models of sales and wages finding that in portugal workers wages respond to permanent shocks on firm performance as opposed to transitory shocks we then explore the factors associated with wage flexibility finding that collective bargaining and minimum wages are associated with higher wage insurance by the firm while the threat of firm bankruptcy reduces it managers receive less protection against permanent shocks than other workers

microdata evidence on the empirical importance of selection effects in menu cost models we use microdata on product prices linked to information on the producing firms that set them to study to what extent the timing of price changes reacts to changes in marginal cost this self selec

insurance within the firm we evaluate the allocation of risk between firms and their workers using matched employer employee panel data unlike previous contributions this paper focuses on idiosyncratic shocks to the firm which are the correct empirical counterpart of the theoretical notion of diversifiable risk we allow for both temporary and permanent shocks to output and find that firms absorb temporary fluctuations fully but insure workers against permanent shocks only partially risk sharing considerations can account for about 15 percent of overall earnings variability the remainder originating from idiosyncratic shocks to individual workers our welfare calculations indicate that firms are an important vehicle of insurance provision

time varying business volatility and the price setting of firms abstract does time varying business uncertainty volatility affect the price setting of firms and in what way we estimate from the micro data of the german ifo business climate survey the impact of idiosyncratic volatility on the extensive margin of firm level price setting behavior heightened uncertainty increases the probability of a price change suggesting that for price setting the volatility effect dominates the wait and see effect in a second step we use structural vector autoregressions to estimate the effects of uncertainty on the intensive pricing margin higher uncertainty leads to an increase in price dispersion and to larger price adjustments

price stickiness in ss models new interpretations of old results abstract what is the relation between infrequent price adjustment and the dynamic response of the aggregate price level to monetary shocks the answer to this question ranges from a one to one link calvo g 1983 prices in a utility maximizing framework journal of monetary economics 12 383 398 to no connection whatsoever caplin a spulber d 1987 menu costs and the neutrality of money quarterly journal of economics 102 703 726 the purpose of this paper is to provide a unified framework to understand the mechanisms behind this wide range of results in doing so we propose new interpretations of key results in this area which in turn suggest the kind of ss model that is likely to generate substantial price rigidity among these new interpretations we revisit caplin and spulber s monetary neutrality result we show that when price stickiness is measured in terms of the impulse response function this result is not a consequence of aggregation as is often assumed but is due instead to the absence of price stickiness at the microeconomic level we also show that the selection effect according to which units that adjust their prices are those that benefit the most is neither necessary nor sufficient to account for the higher aggregate flexibility of ss type models compared to calvo models instead the key concept is the contribution of the extensive margin of adjustment to the aggregate price response the aggregate price level is more flexible than suggested by the microeconomic frequency of adjustment if and only if this term is positive

state dependent or time dependent pricing does it matter for recent u s inflation in the 1988 2004 micro data collected by the u s bureau of labor statistics for the cpi price changes are frequent every 4 7 months depending on the treatment of sale prices and large in absolute value on the order of 10 the size and timing of price changes varies considerably for a given item but the size and probability of a price change are unrelated to the time since the last price change movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price due to offsetting movements in the fraction of price increases and decreases neither leading time dependent models taylor or calvo nor 1 st generation state dependent models match all of these facts some 2 nd generation state dependent models however appear broadly consistent with the empirical patterns

synchronization of price changes by multiproduct firms evidence from canadian newspaper prices abstract using data for canadian daily newspapers we find that price changes of papers owned by the same firm are synchronized on the other hand independently owned newspapers do not appear to change their prices together

the dynamics of markups and inventories in retailing firms this paper is concerned with the interaction between price and inventory decisions in retailing firms and its implications for the dynamics of markups and the existence of sales pro motions we consider a model where a monopolistically competitive retailer decides price and inventories and assumes lump sum costs when placing orders or changing nominal prices tn this model the existence of stockout probabilities and fixed ordering costs generate a cyclical price behaviour characterized by long periods without nominal price changes and short periods with very low prices i e sales promotions we estimate this model using a unique longitudinal dataset with information about retail and wholesale prices inventories orders and sales for several brands in a supermarket chain based on the estimated model we perform several counterfactual experi ments that show the important role that inventories and fixed ordering costs play in the dynamics of retail prices and the frequency of sales promotions in this dataset

more international evidence on the historical properties of business cycles this paper establishes stylized facts about business cycles in the late 19th century using spectral analysis techniques which allow an intuitive description and analysis of cyclical structure in economic fluctuations analysis of industrial production data for 13 countries permits the following generalizations in the advanced north atlantic economies a fairly regular long cycle with a periodicity of 7 10 years is identified in all countries this component explains a substantial fraction of overall variation in industrial production there is some evidence of a less regular less powerful short cycle of 3 5 years duration in peripheral economies experience is varied but it is more often the short cycle that exercises greater influence the long cycle component is shown to be highly correlated among the core economies much less so between core and peripheral economies and least of all among peripheral economies the long cycle is more highly correlated among countries with important trading ties and those on a metallic monetary standard throughout the period

reference prices costs and nominal rigidities we assess the importance of nominal rigidities using a new weekly scanner dataset we find that nominal rigidities take the form of inertia in reference prices and costst defined as the most common prices and costs within a given quarter reference prices are particularly inertial and have an average duration of roughly one year even though weekly prices change roughly once every two weeks we document the relation between prices and costs and find sharp evidence of state dependence in prices we use a simple model to argue that reference prices and costs are useful statistics for macroeconomic

heterogeneity in price rigidity evidence from a case study using microlevel data we combine two data sets to study price rigidity the first consists of weekly time series of retail wholesale and spot prices for twelve products these time series contain two exogenous cost shocks we find that prices exhibit more rigidity in response to the second shock than the first the second data set consists of all publicly available information about the shocks content analysis of these information reveals that the first shock is larger and more persistent and the market has more information on it than the second we conclude therefore that prices are more flexible in response to cost shocks that are larger that are more persistent and on which market participants have more information

optimum pricing policy under stochastic inflation we describe aggregate inflation as a stochastic process in which the rate of change of the price level can be positive or zero where the times spent in each state are of random duration this class of processes includes two state markov chains and renewal processes as special cases it is shown that the optimal pricing policy of a monopolistic firm with non convex costs of price adjustment is s s in its real price i e its nominal price relative to the price level a basic certainty equivalence result is proved i e the firm behaves as if it faces a certain and fixed rate of inflation higher than the actual expected rate the difference between the two rates being a risk premium which depends on the real interest rate and the parameters of the stochastic process one can thus apply previous results from the case of certainty sheshinski and weiss review of economic studies 1977 to obtain comparative static results in particular one finds that an increase in the variance of expected inflation leads firms to choose a pricing policy with larger amplitude in real price the paper also addresses the question of consistency in firms expectations when the price level is determined by the firms actions in this paper we consider pricing policies of individual firms in an inflationary environment each firm expects the general price level to increase and must determine the rate of increase of its own price it is assumed that the firm incurs an adjustment cost when it changes its nominal price consequently firms choose to change prices occasionally rather than continuously

microfoundations of macroeconomic price adjustment survey evidence from swedish firms this paper presents the results of a survey on price setting behavior conducted on a large random sample of swedish firms the median firm adjusts the price once a year state and time dependent price setting are about equally important the four highest ranked explanations for price rigidity in this study implicit contracts sluggish costs explicit contracts and the kinked demand curve have close correspondents among the top five places in two similar large scale surveys carried out in the uk and the u s the results point to the importance of the long term relations with customers for the rigidity of prices the estimated share of sales that go to regular customers is more than 80

why are prices sticky the dynamics of wholesale gasoline prices the menu cost interpretation of sticky prices implies that the probability of a price change should depend on the past history of prices and fundamentals only through the gap between the current price and the frictionless price we find that this prediction is broadly consistent with the behavior of nine philadelphia gasoline wholesalers nevertheless we reject the menu cost model as a literal description of these firms behavior arguing instead that price stickiness arises from strategic considerations of how customers and competitors will react to price changes

optimal sticky prices under rational inattention this paper presents a model in which price setting firms decide what to pay attention to subject to a constraint on information flow when idiosyncratic conditions are more variable or more important than aggregate conditions firms pay more attention to idiosyncratic conditions than to aggregate conditions when we calibrate the model to match the large average absolute size of price changes observed in micro data prices react fast and by large amounts to idiosyncratic shocks but only slowly and by small amounts to nominal shocks nominal shocks have strong and persistent real effects we use the model to investigate how the optimal allocation of attention and the dynamics of prices depend on the firms environment jel e 3 e5 d8