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Price setting behaviour in Latvia: Econometric evidence from CPI micro data

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  • Benkovskis, Konstantins
  • Fadejeva, Ludmila
  • Kalnberzina, Krista

Abstract

This paper discovers the driving forces behind Latvian firms' decisions to adjust prices by using various panel logit models, which explain the probability of observing price change by a broad set of exogenous variables. The results show that the consumer price formation in Latvia is a combination of both state-dependent and time-dependent behaviours. On the one hand, frequency of price changes depends on inflation, demand conditions, and the size of last price changes. On the other hand, we observe some elements of time-dependent price setting like price truncation and strong seasonal pattern. We also find several important differences in the price setting behaviour in cases of price increases and decreases. The fact that frequency of price changes in Latvia depends on inflation as well as demand and supply conditions allows for faster price adjustment process in the event of high distortions in the economy.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 6 ()
Pages: 2115-2124

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:6:p:2115-2124

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Price setting behaviour; Panel logit model; Latvia; CPI micro data;

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References

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  1. Jeffrey M. Wooldridge, 2001. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262232197.
  2. Lünnemann, Patrick & Mathä, Thomas Y., 2005. "Consumer price behaviour in Luxembourg: evidence from micro CPI data," Working Paper Series 0541, European Central Bank.
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  4. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
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  8. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 655-690, May.
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  12. Konstantins Benkovskis & Ludmila Fadejeva & Krista Kalnberzina, 2010. "Price Setting Behaviour in Latvia: Descriptive Evidence from CPI Microdata," Discussion Papers 2010/01, Latvijas Banka.
  13. Claudia Kwapil & Johann Scharler & Josef Baumgartner, 2007. "Price-setting behavior of Austrian firms," Empirica, Springer, vol. 34(5), pages 491-505, December.
  14. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  15. Laurent Baudry & Hervé Le Bihan & Patrick Sevestre & Sylvie Tarrieu, 2007. "What do Thirteen Million Price Records have to Say about Consumer Price Rigidity?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(2), pages 139-183, 04.
  16. Caplin, Andrew S & Spulber, Daniel F, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 703-25, November.
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Cited by:
  1. Konstantins Benkovskis & Ludmila Fadejeva, 2013. "VAT Rate Effect on Price Setting Behaviour in Latvia: Evidence from CPI Micro Data," Working Papers 2013/01, Latvijas Banka.

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