Lumpy Price Adjustments : A Microeconometric Analysis E. Dhyne (NBB, UMH), C. Fuss (NBB, ULB), H. Pesaran (Cambridge U., USC), P. Sevestre (U. Paris I, BdF) The views expressed are those of the authors and do not necessarily reflect the views of the National Bank of Belgium and of the Banque de France. "Price and Wage Rigidities in an Open Economy" National Bank of Belgium - Brussels, October 12-13, 2006
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Lumpy Price Adjustments : A Microeconometric Analysis E. Dhyne (NBB, UMH), C. Fuss (NBB, ULB), H. Pesaran (Cambridge U., USC), P. Sevestre (U. Paris I,
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Lumpy Price Adjustments :
A Microeconometric Analysis
E. Dhyne (NBB, UMH), C. Fuss (NBB, ULB), H. Pesaran (Cambridge U., USC), P. Sevestre (U. Paris I, BdF)
The views expressed are those of the authors and do not necessarily reflect the views of the National Bank of Belgium and of the Banque de France.
"Price and Wage Rigidities in an Open Economy"National Bank of Belgium - Brussels, October 12-13, 2006
PP 2
Introduction
Empirical analysis of the sources of price stickiness:
nominal vs real rigidity
Motivation :
In modern macroeconomics, price rigidity = source of
short-run non neutrality of money
Degree of nominal rigidity One of the determinants of the slope of the NKPC
PP 3
Introduction
New strand of empirical work on the evaluation
of the frequency of consumer price changes
Similar set of stylized facts in industrialized countries
Price changes are infrequent
US : 25% Bils and Klenow (2004), Klenow and Kryvtsov (2005)
Euro area : 15% IPN, Dhyne et al. (2006)
Belgium : 17% Aucremanne and Dhyne (2004)
France : 19% Baudry et al. (2004)
Heterogeneity in price stickiness (oil products => services)
Asymmetry: 4 price changes out of 10 are price decreases
Price changes are relatively large (around 8 -10 %)
PP 4
Introduction
Main question : what’s behind infrequent price changes ?
A firm may consider that it’s more profitable to keep its price
constant between two periods because of
large price adjustment cost: nominal rigidity
small volatility of marginal costs / desired mark-up: real rigidity
Other questions :
Can prices be informative on the degree of "wage" stickiness ?
Are asymmetric price changes caused by asymmetric
price adjustment costs ?
PP 5
A canonical model of price adjustment
A firm i sets its price at time t based on pricing rule
pit = p*it if |p*it-pit-1| > cit
pit = pit-1 if |p*it-pit-1| ≤ cit
With p*it the (unobserved) optimal price given as
p*it = mcit + it = ft + i + it
Common componentof marginal cost and desired mark-up
Firm’s specific componentheterogeneity in price levels, ability of firm i to set its prices above/below ft
Idiosyncratic shockon marginal cost and desired mark-up
PP 6
Unobserved common component ft
Common movement in marginal costs and desired mark-up
Estimation by using cross-sectional averages : generalization
of Pesaran (2006) to non-linear models
where g(ft) non linear function of ft, pit-1 and other parameters
ft only equals to pt when E[cit] = c = 0
Iterative procedure : estimate ft given estimate given ft
Can also be estimated jointly with by ML
Both estimation procedures need N and T large
Summarize with AR(p): ;0 with ˆˆ
110 Nftf tt
K
kktkt
ttt fgpf~~
tf̂
PP 7
Sources of nominal and real rigidities
pit = pit-1 if |ft + i + it - pit-1| ≤ cit
= ft + i + it otherwise
Nominal rigidity :
Expected value of price adjustment cost cit, c
Real rigidity :
Unconditional volatility of ft, std(ft)
or volatility of the common shock,
Volatility of idiosyncratic shock it,
PP 8
The Belgian and French CPI data sets
Belgian CPI : around 10.000.000 individual prices
French CPI : around 13.000.000 individual prices
Prices observed at the retail level from 07/94 to 02/03
Described in Aucremmane and Dhyne (2004, 2005),
Baudry et al. (2004)
Estimation method : Maximum Likelihood with 1 firm