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The Distribution of the Size of Price Changes

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  • Alberto Cavallo
  • Roberto Rigobon

Abstract

Different theories of price stickiness have distinct implications on the number of modes in the distribution of price changes. We formally test for the number of modes in the price change distribution of 36 supermarkets, spanning 22 countries and 5 continents. We present results for three modality tests: the two best-known tests in the statistical literature, Hartigan's Dip and Silverman's Bandwidth, and a test designed in this paper, called the Proportional Mass test (PM). Three main results are uncovered. First, when the traditional tests are used, unimodality is rejected in about 90 percent of the retailers. When we used the PM test, which reduces the impact of smaller modes in the distribution and can be applied to test for modality around zero percent, we still reject unimodality in two thirds of the supermarkets. Second, category-level heterogeneity can account for about half of the PM test's rejections of unimodality. Finally, a simulation of the model in Alvarez, Lippi, and Paciello (2010) shows that the data is consistent a combination of both time and state-dependent pricing behaviors.

Suggested Citation

  • Alberto Cavallo & Roberto Rigobon, 2011. "The Distribution of the Size of Price Changes," NBER Working Papers 16760, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16760
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    Cited by:

    1. Etienne Gagnon & David López-Salido & Nicolas Vincent, 2013. "Individual Price Adjustment along the Extensive Margin," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 235-281.
    2. repec:upd:utppwp:076 is not listed on IDEAS
    3. Banerjee, Shesadri & Bhattacharya, Rudrani, 2017. "Micro-level Price Setting Behaviour in India: Evidence from Group and Sub-Group Level CPI-IW Data," Working Papers 17/217, National Institute of Public Finance and Policy.
    4. Choudhary, M. Ali & Faheem, Abdul & Hanif, M. Nadim & Naeem, Saima & Pasha, Farooq, 2016. "Price setting & price stickiness: A developing economy perspective," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 44-61.
    5. Alejandro Riaño & Fabrice Defever, 2017. "Twin Peaks," 2017 Meeting Papers 454, Society for Economic Dynamics.
    6. Bajari, P. & Cen, Z. & Chernozhukov, V. & Manukonda, M. & Vijaykumar, S. & Wang, J. & Huerta, R. & Li, J. & Leng, L. & Monokroussos, G. & Wang, S., 2025. "Hedonic prices and quality adjusted price indices powered by AI," Journal of Econometrics, Elsevier, vol. 251(C).
    7. Mr. Balazs Csonto & Yuxuan Huang & Mr. Camilo E Tovar Mora, 2019. "Is Digitalization Driving Domestic Inflation?," IMF Working Papers 2019/271, International Monetary Fund.
    8. Yuriy Gorodnichenko & Viacheslav Sheremirov & Oleksandr Talavera, 2018. "Price Setting in Online Markets: Does IT Click?," Journal of the European Economic Association, European Economic Association, vol. 16(6), pages 1764-1811.
    9. Stéphane Dupraz, 2024. "A Kinked‐Demand Theory of Price Rigidity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(2-3), pages 325-363, March.
    10. Steffen Ahrens & Stephen Sacht, 2014. "Estimating a high-frequency New-Keynesian Phillips curve," Empirical Economics, Springer, vol. 46(2), pages 607-628, March.
    11. Erwan Gautier & Ronan Le Saout, 2015. "L'ajustement microéconomique des prix des carburants en France," Working Papers hal-01195759, HAL.
    12. Martin Eichenbaum & Nir Jaimovich & Sergio Rebelo & Josephine Smith, 2014. "How Frequent Are Small Price Changes?," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 137-155, April.
    13. Oriol Valles Codina, 2020. "Economic Production as Life: A Classical Approach to Computational Social Science," Working Papers 2001, New School for Social Research, Department of Economics.
    14. Alberto Cavallo & Roberto Rigobon, 2016. "The Billion Prices Project: Using Online Prices for Measurement and Research," Journal of Economic Perspectives, American Economic Association, vol. 30(2), pages 151-178, Spring.
    15. Alberto Cavallo, 2018. "Scraped Data and Sticky Prices," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 105-119, March.
    16. Kochen Federico, 2016. "Price-Setting in Mexico and the Real Effects of Monetary Shocks," Working Papers 2016-21, Banco de México.
    17. Fernando Alvarez & Francesco Lippi, 2014. "Price Setting With Menu Cost for Multiproduct Firms," Econometrica, Econometric Society, vol. 82(1), pages 89-135, January.
    18. Erwan Gautier & Ronan Le Saout, 2015. "The Dynamics of Gasoline Prices: Evidence from Daily French Micro Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(6), pages 1063-1089, September.
    19. Kota Watanabe & Tsutomu Watanabe, 2017. "Price Rigidity at Near-Zero Inflation Rates: Evidence from Japan," CARF F-Series CARF-F-408, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    20. Alberto Cavallo & Brent Neiman & Roberto Rigobon, 2014. "Currency Unions, Product Introductions, and the Real Exchange Rate," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(2), pages 529-595.

    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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