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Price Rigidity and Price Dispersion: Evidence from Micro Data

  • Eyal Baharad

    (University of Haifa)

  • Benjamin Eden

    ()

    (Department of Economics, Vanderbilt University and the University of Haifa)

We use large unpublished data set about the prices by store of 381 products collected by the Israeli bureau of statistics during 1991-92 in the process of computing the CPI. On average 24% of the stores changed their price where the average is over products and months. Using the standard calculation this would imply that on average prices remain unchanged for 4.1 months. We argue that the standard calculation suffers from a large aggregation bias due to Jensen's inequality and our best estimate suggests that prices remain unchanged on average for more than 7.5 months. We then assess the importance of price rigidity in generating price dispersion. We find no evidence that price rigidity as measured by the frequency of nominal price changes is related to price dispersion. We also find no evidence that a shock to the inflation rate increases price dispersion. These findings are not consistent with standard versions of the staggered price setting model but are roughly consistent with a simple version of the uncertain and sequential trade model.

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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0321.

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Date of creation: Aug 2003
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Handle: RePEc:van:wpaper:0321
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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  1. Mario J. Crucini & Mototsugu Shintani, 2002. "Persistence in Law-Of-One-Price Deviations: Evidence from Micro-Data," Vanderbilt University Department of Economics Working Papers 0222, Vanderbilt University Department of Economics, revised Jul 2004.
  2. repec:nbr:nberre:0126 is not listed on IDEAS
  3. Michael Woodford, 1996. "Loan Commitments and Optimal Monetary Policy," NBER Working Papers 5660, National Bureau of Economic Research, Inc.
  4. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
  5. Mark Bils & Peter J. Klenow, 2002. "Some Evidence on the Importance of Sticky Prices," NBER Working Papers 9069, National Bureau of Economic Research, Inc.
  6. Eden, Benjamin, 1994. "The Adjustment of Prices to Monetary Shocks When Trade Is Uncertain and Sequential," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 493-509, June.
  7. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  8. Saul Lach, 2002. "Existence And Persistence Of Price Dispersion: An Empirical Analysis," The Review of Economics and Statistics, MIT Press, vol. 84(3), pages 433-444, August.
  9. Cecchetti, Stephen G., 1986. "The frequency of price adjustment : A study of the newsstand prices of magazines," Journal of Econometrics, Elsevier, vol. 31(3), pages 255-274, April.
  10. Williamson, Stephen D., 1996. "Sequential markets and the suboptimality of the Friedman rule," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 549-572, June.
  11. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing And The General Equilibrium Dynamics Of Money And Output," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 655-690, May.
  12. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  13. Bental, Benjamin & Eden, Benjamin, 2002. "Reserve requirements and output fluctuations," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1597-1620, November.
  14. Bental, Benjamin & Eden, Bemjamin, 1996. "Money and inventories in an economy with uncertain and sequential trade," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 445-459, June.
  15. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  16. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September.
  17. Anil K. Kashyap, 1990. "Sticky prices: new evidence from retail catalogs," Finance and Economics Discussion Series 112, Board of Governors of the Federal Reserve System (U.S.).
  18. Robert E. Lucas, Jr. & Michael Woodford, 1993. "Real Effects of Monetary Shocks in an Economy with Sequential Purchases," NBER Working Papers 4250, National Bureau of Economic Research, Inc.
  19. Taylor, John B., 1999. "Staggered price and wage setting in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 15, pages 1009-1050 Elsevier.
  20. Eden, Benjamin, 1993. "Inflation and Price Adjustment: An Analysis of Micro Data," Working Papers 94-13, University of Iowa, Department of Economics, revised 1994.
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