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Inflation and price setting in a natural experiment

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  • Konieczny, Jerzy D.
  • Skrzypacz, Andrzej

Abstract

We analyze the behaviour of prices using a large disaggregated data set for Poland during transition from a planned to a market economy. The size of price changes and the frequency of adjustment both fall as the inflation rate declines. Price setters follow a mixture of state- and time-contingent policies. We find that price setters are forward-looking. Intermarket price variability increases with inflation and the effect of expected inflation is much stronger than the effect of unexpected inflation. So the bottom line is this: it takes sellers of sausage, eggs, toothpaste, vacuum cleaners, car-wash operators etc. just a few years to figure out how to adjust prices in a market environment. Our results support both the menu cost, and the rational expectations, hypotheses.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 52 (2005)
Issue (Month): 3 (April)
Pages: 621-632

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Handle: RePEc:eee:moneco:v:52:y:2005:i:3:p:621-632

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
  2. Debelle, Guy & Lamont, Owen, 1997. "Relative Price Variability and Inflation: Evidence from U.S. Cities," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 132-52, February.
  3. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  4. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  5. Van Hoomissen, Theresa, 1988. "Price Dispersion and Inflation: Evidence from Israel," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1303-14, December.
  6. Vining, Daniel R, Jr & Elwertowski, Thomas C, 1976. "The Relationship between Relative Prices and the General Price Level," American Economic Review, American Economic Association, vol. 66(4), pages 699-708, September.
  7. Frederick C. Mills, 1927. "Appendix to "The Behavior of Prices"," NBER Chapters, in: The Behavior of Prices, pages 441-586 National Bureau of Economic Research, Inc.
  8. Frederick C. Mills, 1927. "The Behavior of Prices," NBER Books, National Bureau of Economic Research, Inc, number mill27-1, October.
  9. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  10. Frederick C. Mills, 1927. "Introduction to "The Behavior of Prices"," NBER Chapters, in: The Behavior of Prices, pages 31-36 National Bureau of Economic Research, Inc.
  11. Newey, W.K. & West, K.D., 1992. "Automatic Lag Selection in Covariance Matrix Estimation," Working papers 9220, Wisconsin Madison - Social Systems.
  12. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 287-303, June.
  13. Zvi Hercowitz, 1980. "Money and the Dispersion of Relative Prices," NBER Working Papers 0431, National Bureau of Economic Research, Inc.
  14. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February.
  15. Jerzy D. Konieczny & Andrzej Skrzypacz, 2000. "Inflation and Price Setting in a Natural Experiment," Econometric Society World Congress 2000 Contributed Papers 1132, Econometric Society.
  16. Domberger, Simon, 1987. "Relative Price Variability and Inflation: A Disaggregated Analysis," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 547-66, June.
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