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Do decreasing hazard functions for price changes make any sense?

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Author Info
Luis J. Álvarez () (Banco de España)
Pablo Burriel () (Banco de España)
Ignacio Hernando () (Banco de España)

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Abstract

A common finding in empirical studies using micro data on consumer and producer prices is that hazard functions for price changes are decreasing. This means that a firm will have a lower probability of changing its price the longer it has kept it unchanged. This result is at odds with standard models of price setting. In this note a simple explanation is proposed: decreasing hazards may result from aggregating heterogeneous price setters. We show analytically the form of this heterogeneity effect for the most commonly used pricing rules and find that the aggregate hazard is (nearly always) decreasing. Results are illustrated using Spanish producer and consumer price data. We find that a very accurate representation of individual data is obtained by considering just 4 groups of agents: one group of flexible Calvo agents, one group of intermediate Calvo agents and one group of sticky Calvo agents plus an annual Calvo process.

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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/05/Fic/dt0508e.pdf
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File Function: First version, April 2005
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Publisher Info
Paper provided by Banco de España in its series Banco de España Working Papers with number 0508.

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Length: 47 pages
Date of creation: Apr 2005
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Handle: RePEc:bde:wpaper:0508

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Related research
Keywords: hazard function; price setting models; heterogeneous agents; mixture models;

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Find related papers by JEL classification:
C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
D40 - Microeconomics - - Market Structure and Pricing - - - General
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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  1. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October. [Downloadable!] (restricted)
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  2. Michael Dotsey, 2002. "Pitfalls in interpreting tests of backward-looking pricing in New Keynesian models," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 37-50. [Downloadable!]
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  4. Jeffrey R. Campbell & Benjamin Eden, 2005. "Rigid prices: evidence from U.S. scanner data," Working Paper Series WP-05-08, Federal Reserve Bank of Chicago. [Downloadable!]
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  5. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
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  6. Camacho, Maximo & Pérez-Quirós, Gabriel, 2005. "Jump-and-Rest Effects of US Business Cycles," CEPR Discussion Papers 4975, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Luis J. Álvarez & Ignacio Hernando, 2005. "The price setting behaviour of spanish firms - evidence from survey data," Working Paper Series 538, European Central Bank. [Downloadable!]
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  12. Robert-Paul Berben & Alberto Locarno & Julian Morgan & Javier Valles, 2004. "Cross-country differences in monetary policy transmission," Working Paper Series 400, European Central Bank. [Downloadable!]
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  13. Silvia Fabiani & Claudia Kwapil & Martine Druant & Ignacio Hernando & Bettina Landau & Claire Loupias & Fernando Martins & Thomas Y. Mathä & Roberto Sabbatini & Harald Stahl & Ad C. J. Stokman, 2005. "The pricing behaviour of firms in the euro area - new survey evidence," Working Paper Series 535, European Central Bank. [Downloadable!]
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  20. Buisan, Ana & Caballero, Juan C. & Campa, Jose M. & Jimenez, Noelia, 2004. "La importancia de la histéresis en las exportaciones de manufacturas de los países de la UEM," IESE Research Papers D/561, IESE Business School. [Downloadable!]
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  25. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Luis J. Alvarez, 2007. "What Do Micro Price Data Tell Us on the Validity of the New Keynesian Phillips Curve?," Kiel Working Papers 1330, Kiel Institute for the World Economy. [Downloadable!]
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  2. Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Jesús Fernández-Villaverde, 2009. "The Econometrics of DSGE Models," NBER Working Papers 14677, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Filippo Altissimo & Michael Ehrmann & Frank Smets, 2006. "Inflation persistence and price-setting behaviour in the euro area : a summary of the Inflation Persistence Network evidence," Research series 200610-7, National Bank of Belgium. [Downloadable!]
  5. Jean Imbs & Eric Jondeau & Florian Pelgrin, 2007. "Aggregating Phillips curves," Working Paper Series 785, European Central Bank. [Downloadable!]
    Other versions:
  6. Katrin Tinn, 2005. "Optimal research in financial markets with heterogeneous private information a rational expectations model," Working Paper Series 493, European Central Bank. [Downloadable!]
    Other versions:
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