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The Distribution of the Size of Price Changes

Author Info

  • Cavallo, Alberto

    ()

    (MIT Sloan.)

  • Rigobon, Roberto

    ()

    (MIT Sloan & NBER.)

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.

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Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2011-011.

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Date of creation: Jun 2011
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Handle: RePEc:rbp:wpaper:2011-011
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Find related papers by JEL classification:
  • E00 - Macroeconomics and Monetary Economics - - General - - - General
  • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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Cited by:

  1. Martin S. Eichenbaum & Nir Jaimovich & Sergio Rebelo & Josephine Smith, 2012. "How Frequent Are Small Price Changes?," NBER Working Papers 17956, National Bureau of Economic Research, Inc.
  2. Gagnon, Etienne & López-Salido, J David & Vincent, Nicolas, 2012. "Individual Price Adjustment along the Extensive Margin," CEPR Discussion Papers 9143, C.E.P.R. Discussion Papers.
  3. Gautier, E. & Le Saout, R., 2012. "The Dynamics of Gasoline Prices: Evidence from Daily French Micro Data," Working papers 375, Banque de France.
  4. Yuriy Gorodnichenko & Viacheslav Sheremirov & Oleksandr Talavera, 2014. "Price Setting in Online Markets: Does IT Click?," NBER Working Papers 20819, National Bureau of Economic Research, Inc.
  5. Ahrens, Steffen & Sacht, Stephen, 2011. "Estimating a high-frequency New Keynesian Phillips curve," Economics Working Papers 2011,08, Christian-Albrechts-University of Kiel, Department of Economics.
  6. Roberto Rigobon & Brent Neiman & Alberto Cavallo, 2013. "Product Introductions, Currency Unions, and the Real Exchange Rate," 2013 Meeting Papers 1357, Society for Economic Dynamics.
  7. Fernando Alvarez & Francesco Lippi, 2014. "Price Setting With Menu Cost for Multiproduct Firms," Econometrica, Econometric Society, vol. 82(1), pages 89-135, 01.
  8. Alberto Cavallo & Brent Neiman & Roberto Rigobon, 2012. "Currency Unions, Product Introductions, and the Real Exchange Rate," NBER Working Papers 18563, National Bureau of Economic Research, Inc.

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