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Variance Decomposition of Prices in an Emerging Economy

Author

Listed:
  • Fernando Borraz

    (Banco Central del Uruguay)

  • Joaquín Saldain

    (Banco Central del Uruguay)

Abstract

We use a one million good-level dataset of prices in Uruguay which comprises grocery stores in the capital city of Montevideo to decompose the variance of prices to identify the sources of such variability. We estimate the specific contribution of the product, chain and individual store to the variability of prices. Estimates are carried out with the data in different periods, with time trend inflation and excluding nonhomogeneous goods to estimate robust results. We use the three error model to decompose the price variation to find that chain specific shocks account for half of it. The importance of shocks to individual products and product categories common to all stores is the other half. Our results indicate that the importance of chains in price variation in Uruguay is halfway between that of US and Chile. Therefore, in an emerging economy the price strategies of retailers are not so much different than in the US to explain price variation than previously thought.

Suggested Citation

  • Fernando Borraz & Joaquín Saldain, 2015. "Variance Decomposition of Prices in an Emerging Economy," Documentos de trabajo 2015001, Banco Central del Uruguay.
    • Handle: RePEc:bku:doctra:2015001
    as

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    File URL: https://www.bcu.gub.uy/Estadisticas-e-Indicadores/Documentos%20de%20Trabajo/1.2015.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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