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Inflation and price setting in a natural experiment

  • Konieczny, Jerzy D.
  • Skrzypacz, Andrzej

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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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 52 (2005)
Issue (Month): 3 (April)
Pages: 621-632

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Handle: RePEc:eee:moneco:v:52:y:2005:i:3:p:621-632
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Frederick C. Mills, 1927. "The Behavior of Prices," NBER Books, National Bureau of Economic Research, Inc, number mill27-1, January.
  2. Jerzy D. Konieczny & Andrzej Skrzypacz, 2000. "Inflation and Price Setting in a Natural Experiment," Econometric Society World Congress 2000 Contributed Papers 1132, Econometric Society.
  3. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
  4. Newey, Whitney K & West, Kenneth D, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 631-53, October.
  5. Andrew C. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," NBER Working Papers 2311, National Bureau of Economic Research, Inc.
  6. Vining, Daniel R, Jr & Elwertowski, Thomas C, 1976. "The Relationship between Relative Prices and the General Price Level," American Economic Review, American Economic Association, vol. 66(4), pages 699-708, September.
  7. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  8. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 287-303, June.
  9. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February.
  10. Frederick C. Mills, 1927. "Introduction to "The Behavior of Prices"," NBER Chapters, in: The Behavior of Prices, pages 31-36 National Bureau of Economic Research, Inc.
  11. Van Hoomissen, Theresa, 1988. "Price Dispersion and Inflation: Evidence from Israel," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1303-14, December.
  12. Zvi Hercowitz, 1980. "Money and the Dispersion of Relative Prices," NBER Working Papers 0431, National Bureau of Economic Research, Inc.
  13. Guy Debelle & Owen Lamont, 1996. "Relative Price Variability and Inflation: Evidence from US Cities," NBER Working Papers 5627, National Bureau of Economic Research, Inc.
  14. Domberger, Simon, 1987. "Relative Price Variability and Inflation: A Disaggregated Analysis," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 547-66, June.
  15. Frederick C. Mills, 1927. "Appendix to "The Behavior of Prices"," NBER Chapters, in: The Behavior of Prices, pages 441-586 National Bureau of Economic Research, Inc.
  16. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
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