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On the importance of sectoral and regional shocks for price setting

Listed author(s):
  • Beck, Guenter W.
  • Hubrich, Kirstin
  • Marcellino, Massimiliano

We use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lapping data blocks. This allows us to separately estimate aggregate, sectoral, country-specific and regional components of price changes. We thereby provide an improved estimate of the sectoral factor in comparison with previous literature, which decomposes price changes into an aggregate and idiosyncratic component only, and interprets the latter as sectoral. We find that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. We further contribute to the literature on price setting by providing evidence that country- and region-specific factors play an important role in addition to the sector-specific factors, emphasising heterogeneity of inflation dynamics along different dimensions. We also conclude that sectoral price changes have a “geographical” dimension, that leads to new insights regarding the properties of sectoral price changes.

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File URL: https://www.econstor.eu/bitstream/10419/97768/1/IMFS_WP_63.pdf
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Paper provided by Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS) in its series IMFS Working Paper Series with number 63.

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Date of creation: 2012
Handle: RePEc:zbw:imfswp:63
Contact details of provider: Web page: http://www.imfs-frankfurt.de/en.html
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  1. Kapetanios, George & Marcellino, Massimiliano, 2010. "Factor-GMM estimation with large sets of possibly weak instruments," Computational Statistics & Data Analysis, Elsevier, vol. 54(11), pages 2655-2675, November.
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  11. Granger, C. W. J., 1980. "Long memory relationships and the aggregation of dynamic models," Journal of Econometrics, Elsevier, vol. 14(2), pages 227-238, October.
  12. Kirstin Hubrich & Guenter Beck & Massimiliano Marcellino, "undated". "Regional Inflation Dynamics within and across Euro Area Countries and a Comparison with the US," Regional and Urban Modeling 283600037, EcoMod.
  13. Jae Won Lee & Carlos Carvalho, 2010. "Sectoral Price Facts in a Sticky-Price Model," 2010 Meeting Papers 997, Society for Economic Dynamics.
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  17. Todd E. Clark, 2006. "Disaggregate evidence on the persistence of consumer price inflation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(5), pages 563-587.
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  23. repec:hrv:faseco:30703875 is not listed on IDEAS
  24. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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  26. Guenter W. Beck & Kirstin Hubrich & Massimiliano Marcellino, 2009. "Regional inflation dynamics within and across euro area countries and a comparison with the United States," Economic Policy, CEPR;CES;MSH, vol. 24, pages 141-184, 01.
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