Time- or state-dependent price setting rules? Evidence from micro data

Abstract

In this paper we use two rich micro-datasets on Portuguese …rms to analyse the ability of time and state dependent price setting rules to explain durations of price spells, or the probability of price changes. Our results suggest that time dependent models are unable to adequately describe the features of the data and that state dependent models are required to fully characterise the price setting behaviour of these …rms. Speci…cally, it is found that the impacts on the probability of a price change of in ‡ation, the level of economic activity and the magnitude of the last price change, are both statistically and economically signi…cant. Moreover, it is seen that the impacts di¤er for negative and positive values of these covariates.JEL classi…cation codes: C41, D40, E31.

Intrinsic inflation persistence

“…There are now many studies that estimate the hazard function for price adjustment using microeconomic data on individual prices (Baumgartner et al, 2005;Campbell and Eden, 2005;Cecchetti, 1986;Dias et al, 2005;Fougère et al, 2005;Götte et al, 2005;Nakamura and Steinsson, 2007). There are a range of findings in this literature.…”

“…Fougère, Le Bihan and Sevestre (2005) also find some support for increasing hazard functions for the majority of goods and services. On the other hand, work by Campbell and Eden (2005), Dias, Marques and Santos Silva (2005) and others find strong evidence in favour of mainly downward-sloping hazards. Other studies such as Baumgartner, Glatzer, Rumler and Stiglbauer (2005) suggest that the hazard function is decreasing but punctuated by spikes.…”

“…Both papers use a small number of goods, but have data spanning several decades. Others such as Campbell and Eden (2005) and Dias et al (2005) find strong evidence that the hazard function is downward sloping. Some studies such as Baumgartner et al (2005) agree that the hazard function is generally downward sloping, but find that the negative slope is interrupted by sharp spikes at regular intervals.…”

Sticky Prices in the Euro Area: A Summary of New Micro-Evidence

“…Micro founded macro models of inflation are typically based on highly stylised assumptions on firms pricing behaviour, as in Calvo (1983) and Taylor (1980 See Álvarez et al (2005a), Álvarez and Hernando (2004), Dhyne (2004, 2005), Baudry et al (2004, Dias et al (2004Dias et al ( , 2005, Fougère et al (2005), Hoffmann and Kurz-Kim (2005), Jonker et al (2004), Lünnemann and Mathä (2005a), Veronese et al (2005), Vilmunen and Laakkonen (2005) and the summary by Dhyne et al (2005).…”

When do firms adjust prices? Evidence from micro panel data

“…On the other hand, Nakamura and Steinsson (2007) find that the frequency of price increases responds strongly to inflation using the U.S. CPI data. In a similar vein Dias et al (2005) find that state dependent models are required to fully characterize the price setting behavior using Portuguese data. According to their estimates, inflation, the level of economic activity and the magnitude of the last price change are relevant variables affecting the probability of changing prices.…”