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Asymmetric Price Adjustment - Evidence For India

Author

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  • Sartaj Rasool Rather

    (Madras School of Economics)

  • S. Raja Sethu Durai

    (Department of Economics, Pondicherry University, Puducherry)

  • M. Ramachandran

    (Department of Economics, Pondicherry University, Puducherry)

Abstract

We construct an error correction mechanism to examine whether firms’ price adjustment is asymmetric as anticipated by Ball and Mankiw (1994). We have used monthly time series data on prices of 418 commodities, which constitute 97 percent of commodity price basket used in the construction of wholesale price index in India. The empirical evidence indicates that the price adjustment of most of the firms exhibits strong asymmetry; shocks that increases firms’ desired prices causes quicker and larger rise in prices whereas shocks that lower desired prices causes smaller or no fall in prices. Also, we identify a threshold value for each firm below which it does not allow its relative price to fall. These evidences imply that larger relative price variability can trigger inflation even in the absence of demand shocks. Moreover, the distribution of output is likely to be negatively skewed even if the demand shocks are symmetric.

Suggested Citation

  • Sartaj Rasool Rather & S. Raja Sethu Durai & M. Ramachandran, 2014. "Asymmetric Price Adjustment - Evidence For India," Working Papers 2014-094, Madras School of Economics,Chennai,India.
  • Handle: RePEc:mad:wpaper:2014-094
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    References listed on IDEAS

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    More about this item

    Keywords

    Menu cost; asymmetric price adjustment; relative price; error correction;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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

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