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Price variability and price dispersion in a stable monetary environment: Evidence from German retail markets

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  • Fengler, Matthias R.
  • Winter, Joachim

Abstract

We investigate the relationship between inflation and price variation using highly disaggregated, weekly price data for consumption goods recorded in Germany during 1995, a low-inflation period. We find a significant positive correlation between the rates of price change and price dispersion, both at the level of individual products and product groups. However, we find no correlation between the rates of price change and price variability. Together with results from similar studies, Tommasi (1993. Optimal Pricing, Inflation, and the Cost of Price Adjustment. MIT Press: London, Cambridge, MA; 485-511) and Parsley (1996. J. Money Credit Banking 28:323-341), a remarkable pattern emerges: when aggregate nominal shocks are small, only price dispersion is correlated with price changes. As the rate of inflation rises, both variability and dispersion become affected. During hyper-inflation, systematic movements of price dispersion seem to disappear. We conclude that price dispersion is best explained by micro-economic frictions in price adjustment, whereas price variability appears to be related to costly price search and information problems. Copyright

Suggested Citation

  • Fengler, Matthias R. & Winter, Joachim, 2007. "Price variability and price dispersion in a stable monetary environment: Evidence from German retail markets," Munich Reprints in Economics 20338, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:20338
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    1. repec:awi:wpaper:0477 is not listed on IDEAS
    2. Ater, Itai & Gerlitz, Omri, 2017. "Round prices and price rigidity: Evidence from outlawing odd prices," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 188-203.
    3. Levy, Daniel, 2007. "Price Rigidity and Flexibility: New Empirical Evidence - Introduction to the Special Issue," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 28(7 (Specia), pages 639-647.
    4. Daniel Levy, 2007. "Price rigidity and flexibility: new empirical evidence," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 639-647.

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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