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Using Brexit to Identify the Nature of Price Rigidities

Author

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  • Bart Hobijn

    (Arizona State University)

  • Adam Shapiro

    (Federal Reserve Bank of San Francisco)

  • Fernanda Nechio

    (Federal Reserve Bank of San Francisco)

Abstract

Using price quote data that underpin the official U.K. consumer price index (CPI), we analyze the effects of the unexpected passing of the Brexit referendum to the dynamics of price adjustments. The sizable depreciation of the British pound that immediately followed Brexit works as a quasi-experiment, enabling us to study the transmission of a large common marginal cost shock to inflation as well as the distribution of prices within granular product categories. A large portion of the inflationary effect is attributable to the size of price adjustments, implying that a time-dependent price-setting model can match the response of aggregate inflation reasonably well. The state-dependent model fares better in capturing the endogenous selection of price changes at the lower end of the distribution, however, it misses on the magnitude of the adjustment conditional on selection. In the state-dependent model, prices at the higher end of the distribution change by larger amounts, which is inconsistent with the data.

Suggested Citation

  • Bart Hobijn & Adam Shapiro & Fernanda Nechio, 2019. "Using Brexit to Identify the Nature of Price Rigidities," 2019 Meeting Papers 693, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:693
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