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Global Versus Local Shocks in Micro Price Dynamics

  • Philippe Andrade
  • Marios Zachariadis

A number of recent papers point to the importance of distinguishing between the price reaction to micro and macro shocks in order to reconcile the volatility of individual prices with the observed persistence of aggregate inflation. We emphasize instead the importance of distinguishing between global and local shocks. We exploit a panel of 276 micro price levels collected on a semi-annual frequency from 1990 to 2010 across 88 cities in 59 countries around the world, that enables us to distinguish between different types (local and global) of micro and macro shocks. The persistence associated with each of these components and its relation with volatility of the different components, provides a number of new facts. Prices respond more slowly to global shocks as compared to local ones .in particular, prices respond faster to local macro shocks than to global micro ones .implying that the relatively slow response of prices to macro shocks documented in recent studies comes from global rather than local sources. In addition, more volatility in local conditions leads to more persistent relative price distortions due to slower response of prices to global shocks, with this local -global link more than twice as large as the corresponding micro-macro link. Finally, global shocks account for half of the volatility in prices. Overall, our results imply that global shocks are important when analyzing price dynamics or assessing price-setting models.

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File URL: http://papers.econ.ucy.ac.cy/RePEc/papers/10-2011.pdf
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Paper provided by University of Cyprus Department of Economics in its series University of Cyprus Working Papers in Economics with number 10-2011.

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Length: 43 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:ucy:cypeua:10-2011
Contact details of provider: Web page: http://www.ucy.ac.cy/econ/en

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