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The Timing of Price Changes and the Role of Heterogeneity


  • Daniel Kaufmann


While price-setting models usually suggest constant or increasing hazard functions for price changes, empirical studies often find decreasing hazards, possibly due to misspecified or neglected heterogeneity. This paper attempts to disentangle the downward bias into various sources: observed and unobserved heterogeneity which can be either constant or time-varying. Based on micro data from the Swiss CPI, the paper finds that in order to resolve the downward bias of the hazard function for price changes, we have to (i) control for time-varying heterogeneity in addition to cross-sectional factors and (ii) exclude temporary price changes such as sales prices from the data set. Among the time-varying factors affecting the probability of price changes, various proxies of firms' marginal costs seem to be key. The empirical findings presented in this paper are consistent with recent menu cost models which stress the role of time-varying heterogeneity and temporary price cuts for price setting.

Suggested Citation

  • Daniel Kaufmann, 2010. "The Timing of Price Changes and the Role of Heterogeneity," Working Papers 2010-02, Swiss National Bank.
  • Handle: RePEc:snb:snbwpa:2010-02

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    References listed on IDEAS

    1. Patrick J. Kehoe & Virgiliu Midrigan, 2007. "Sales and the real effects of monetary policy," Working Papers 652, Federal Reserve Bank of Minneapolis.
    2. Fougere, Denis & Le Bihan, Herve & Sevestre, Patrick, 2007. "Heterogeneity in Consumer Price Stickiness: A Microeconometric Investigation," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 247-264, July.
    3. Dias, D.A. & Marques, C. Robalo & Santos Silva, J.M.C., 2007. "Time- or state-dependent price setting rules? Evidence from micro data," European Economic Review, Elsevier, vol. 51(7), pages 1589-1613, October.
    4. Daniel Kaufmann, 2009. "Price-Setting Behaviour in Switzerland: Evidence from CPI Micro Data," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 145(III), pages 293-349, September.
    5. Jeffrey R. Campbell & Benjamin Eden, 2014. "Rigid Prices: Evidence From U.S. Scanner Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 423-442, May.
    6. Caballero, Ricardo J. & Engel, Eduardo M.R.A., 2007. "Price stickiness in Ss models: New interpretations of old results," Journal of Monetary Economics, Elsevier, vol. 54(Supplemen), pages 100-121, September.
    7. Mikhail Golosov & Robert E. Lucas Jr., 2007. "Menu Costs and Phillips Curves," Journal of Political Economy, University of Chicago Press, vol. 115, pages 171-199.
    8. Emmanuel Dhyne & Luis J. Alvarez & Herve Le Bihan & Giovanni Veronese & Daniel Dias & Johannes Hoffmann & Nicole Jonker & Patrick Lunnemann & Fabio Rumler & Jouko Vilmunen, 2006. "Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 171-192, Spring.
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    11. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    12. Roberto G. Gutierrez & Shana Carter & David M. Drukker, 2001. "On boundary-value likelihood-ratio tests," Stata Technical Bulletin, StataCorp LP, vol. 10(60).
    13. Baumgartner, Josef & Glatzer, Ernst & Rumler, Fabio & Stiglbauer, Alfred, 2005. "How frequently do consumer prices change in Austria? Evidence from micro CPI data," Working Paper Series 523, European Central Bank.
    14. Andrew S. Caplin & Daniel F. Spulber, 1987. "Menu Costs and the Neutrality of Money," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 703-725.
    15. Richard Dennis, 2006. "The frequency of price adjustment and New Keynesian business cycle dynamics," Working Paper Series 2006-22, Federal Reserve Bank of San Francisco.
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    More about this item


    price setting; hazard function; downward bias; heterogeneity; sales prices; state-dependent pricing;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies

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