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Price Setting Behaviour in Latvia: Econometric Evidence from CPI Microdata

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  • Konstantins Benkovskis
  • Ludmila Fadejeva
  • Krista Kalnberzina

Abstract

This paper discovers the driving forces behind 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 of the models show that the consumer price formation in Latvia is a combination of both state-dependent and time-dependent behaviour. 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, e.g. price truncation and strong seasonal pattern. We also find several important differences in the price setting behaviour for 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 could be seen as a prerequisite for faster price adjustment process in the event of distortions in the economy. In the case of economic imbalances, statedependent price formation changes flexibility of prices and ensures a faster adjustment process towards equilibrium.

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Bibliographic Info

Paper provided by Latvijas Banka in its series Working Papers with number 2011/01.

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Date of creation: 28 Jan 2011
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Handle: RePEc:ltv:wpaper:201101

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Keywords: price setting behaviour; Latvia's consumer prices; frequency of price change; sales; time-dependent pricing; state-dependent pricing; panel logit model;

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References

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  1. Fabiani, Silvia & Druant, Martine & Hernando, Ignacio & Kwapil, Claudia & Landau, Bettina & Loupias, Claire & Martins, Fernando & Mathä, Thomas Y. & Sabbatini, Roberto & Stahl, Harald & Stokman, Ad C, 2005. "The pricing behaviour of firms in the euro area: new survey evidence," Working Paper Series, European Central Bank 0535, European Central Bank.
  2. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
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  4. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
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  10. Aucremanne, Luc & Dhyne, Emmanuel, 2005. "Time-dependent versus state-dependent pricing: a panel data approach to the determinants of Belgian consumer price changes," Working Paper Series, European Central Bank 0462, European Central Bank.
  11. Patrick Lünnemann & Thomas Mathä, 2005. "Consumer price behaviour in Luxembourg: evidence from micro CPI data," BCL working papers 17, Central Bank of Luxembourg.
  12. Carlsson, Mikael & Nordström Skans, Oskar, 2009. "Evaluating Microfoundations for Aggregate Price Rigidities: Evidence from Matched Firm- Level Data on Product Prices and Unit Labor Cost," Working Paper Series 231, Sveriges Riksbank (Central Bank of Sweden).
  13. Konstantins Benkovskis & Ludmila Fadejeva & Krista Kalnberzina, 2010. "Price Setting Behaviour in Latvia: Descriptive Evidence from CPI Microdata," Discussion Papers, Latvijas Banka 2010/01, Latvijas Banka.
  14. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(5), pages 947-985, October.
  15. 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, MIT Press, vol. 114(2), pages 655-690, May.
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  18. 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.
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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, Latvijas Banka 2013/01, Latvijas Banka.

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