Price Setting Behavior and Hazard Functions: Evidence from Japanese CPI Micro Data

We explore the micro price setting behavior using micro data of the consumer price index (CPI) in Japan. We estimate price hazard functions by the finite mixture model with multiple spells allowing the heterogeneity among price setters. Our estimation supports these striking findings. First, unlike much literature, our estimation finds increasing hazard functions and no decreasing hazard function. The estimated hazard functions are classified mainly into four groups: i) the flexible group; ii) the Calvo pricing group with low frequencies; iii) the Taylor pricing group with regular price changes; and iv) the increasing hazard group. Second, a decreasing empirical hazard function, observed in many countries as well as in Japan, is reproduced by estimated hazard functions of those four groups. Third, the increasing hazard group is likely to follow the time-dependent pricing rather than the state-dependent pricing in our sample period 2000-2004.