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The Timing of Price Changes and the Role of Heterogeneity

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  • Daniel Kaufmann

Abstract

While price-setting models usually suggest constant or increasing hazard functions for price changes, empirical studies often find decreasing hazards, possibly due to misspecified or neglected heterogeneity. This paper attempts to disentangle the downward bias into various sources: observed and unobserved heterogeneity which can be either constant or time-varying. Based on micro data from the Swiss CPI, the paper finds that in order to resolve the downward bias of the hazard function for price changes, we have to (i) control for time-varying heterogeneity in addition to cross-sectional factors and (ii) exclude temporary price changes such as sales prices from the data set. Among the time-varying factors affecting the probability of price changes, various proxies of firms' marginal costs seem to be key. The empirical findings presented in this paper are consistent with recent menu cost models which stress the role of time-varying heterogeneity and temporary price cuts for price setting.

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Bibliographic Info

Paper provided by Swiss National Bank in its series Working Papers with number 2010-02.

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Length: 69 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:snb:snbwpa:2010-02

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Keywords: price setting; hazard function; downward bias; heterogeneity; sales prices; state-dependent pricing;

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  1. Fougere, Denis & Le Bihan, Herve & Sevestre, Patrick, 2007. "Heterogeneity in Consumer Price Stickiness: A Microeconometric Investigation," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 247-264, July.
  2. Campbell Leith & Jim Malley, . "A Sectoral Analysis of Price-Setting Behavior in US Manufacturing Industries," Working Papers 2003_7, Business School - Economics, University of Glasgow, revised May 2003.
  3. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  4. Daniel Kaufmann, 2008. "Price-Setting Behaviour in Switzerland Evidence from CPI Micro Data," Working Papers 2008-15, Swiss National Bank.
  5. Ben Eden & Jeff Campbell, 2004. "Rigid Prices: Evidence from US scanner data," 2004 Meeting Papers 461, Society for Economic Dynamics.
  6. Ricardo J. Caballero & Eduardo M.R.A. Engel, 2007. "Price Stickiness in Ss Models: New Interpretations of Old Results," NBER Working Papers 12945, National Bureau of Economic Research, Inc.
  7. Baumgartner, Josef & Glatzer, Ernst & Rumler, Fabio & Stiglbauer, Alfred, 2005. "How frequently do consumer prices change in Austria? Evidence from micro CPI data," Working Paper Series 0523, European Central Bank.
  8. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115, pages 171-199.
  9. Dias, D.A. & Marques, C. Robalo & Santos Silva, J.M.C., 2007. "Time- or state-dependent price setting rules? Evidence from micro data," European Economic Review, Elsevier, vol. 51(7), pages 1589-1613, October.
  10. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  11. Roberto G. Gutierrez & Shana Carter & David M. Drukker, 2001. "On boundary-value likelihood-ratio tests," Stata Technical Bulletin, StataCorp LP, vol. 10(60).
  12. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1415-1464, November.
  13. Emmanuel Dhyne & Luis J. Alvarez & Herve Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lunnemann & Fabio Rumler & Jouko Vilmunen, 2006. "Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 171-192, Spring.
  14. Patrick J. Kehoe & Virgiliu Midrigan, 2007. "Sales and the real effects of monetary policy," Working Papers 652, Federal Reserve Bank of Minneapolis.
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