Inflation and price setting in a natural experiment
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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- Konieczny, Jerzy D. & Skrzypacz, Andrzej, 2005.
"Inflation and price setting in a natural experiment,"
Journal of Monetary Economics,
Elsevier, vol. 52(3), pages 621-632, April.
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