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Global versus local shocks in micro price dynamics

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  • Andrade, P.
  • Zachariadis, M.

Abstract

A number of recent papers point to the importance of distinguishing between the price reaction to micro and macro shocks in order to reconcile the volatility of individual prices with the observed persistence of aggregate inflation. We emphasize instead the importance of distinguishing between global and local shocks. We exploit a panel of 276 micro price levels collected on a semi-annual frequency from 1990 to 2010 across 88 cities in 59 countries around the world, that enables us to distinguish between different types (local and global) of micro and macro shocks. We find that global shocks have more persistent effects on prices as compared to local ones e.g. prices respond faster to local macro shocks than to global micro ones, implying that the relatively slow response of prices to macro shocks documented in recent studies comes from global rather than local sources. Global macro shocks have the most persistent effect on prices, with the majority of goods and locations sharing a single source of trend over time stemming from these shocks. Finally, both local macro and local micro shocks are associated with relatively fast price convergence.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 365.

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Length: 48 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bfr:banfra:365

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Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/
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Related research

Keywords: global shocks; local shocks; micro shocks; macro shocks; price adjustment; micro-macro gap; price-setting models; micro prices.;

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References

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Cited by:
  1. Raphael A Auer & Philip Sauré, 2013. "The globalisation of inflation: a view from the cross section," BIS Papers chapters, in: Bank for International Settlements (ed.), Globalisation and inflation dynamics in Asia and the Pacific, volume 70, pages 113-118 Bank for International Settlements.
  2. Carlos Carvalho & Jae Won Lee, 2011. "Sectoral price facts in a sticky-price model," Staff Reports 495, Federal Reserve Bank of New York.
  3. Mario J. Crucini & Christopher I. Telmer, 2012. "Microeconomic Sources of Real Exchange Rate Variability," NBER Working Papers 17978, National Bureau of Economic Research, Inc.

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