Search, Costly Price Adjustment and the Frequency of Price Changes – Theory and Evidence,
joint with Andrzej Skrzypacz,
We establish a new empirical finding that the intensity of search for the best price affects the frequency of nominal price changes. This relationship holds in very different economies and for various proxies for search intensity. We derive this relationship from a model of monopolistically competitive firms that face menu costs of changing nominal prices and heterogeneous consumers who search for the best price. We discuss alternative explanations and argue that they do not explain the observed correlations. Our results establish that pricing policies differ endogenously in the cross-section. This may be an important feature missing in many macroeconomic models based on nominal rigidities with exogenous frequency of price changes.
Regular Adjustment – Theory and Evidence,
joint with Fabio Rumler, European Central Bank Working Paper 669, August 2006.
We ask why, in many circumstances and many environments, decision-makers choose to act on a time-regular basis (e.g. adjust every six weeks, etc.) or on a state-regular basis (e.g. change an interest rate by 0.25%, etc.), even though such an approach appears suboptimal. The paper attributes regular behaviour to adjustment cost heterogeneity. The reasons for this heterogeneity are discussed. We show that, given the cost heterogeneity, the likelihood of adopting regular policies depends on the shape of the benefit function: the flatter it is, the more likely, ceteris paribus, is regular adjustment. In general, however, there is no clear relationship between the degree of cost and benefit function heterogeneity and the incidence of regular adjustment. We provide sufficient conditions under which the less frequent are adjustments, the greater is the incidence of regular policies.
To test the model we use a large Austrian data set, which consists of the direct price information collected by the statistical office and covers 80% of the CPI over eight years. We run cross-sectional tests, regressing the proportion of attractive prices and, separately, the excess proportion of price changes at the beginning of a year and at the beginning of a quarter, on various conditional frequencies of adjustment, inflation and its variability, dummies for good types, and other relevant variables. The results provide strong support for the model: the lower is, in a given market, the conditional frequency of price changes, the higher is the incidence of time- and state-regular adjustment.
Temporal Distribution of Price Changes: Staggering in the Large and Synchronization in the Small,
joint with Emmanuel Dhyne, March 1, 2007.
Temporal distribution of individual price changes is of crucial importance for business cycle theory and for the microfoundations of price adjustment. While many researchers routinely assume that price changes are staggered over time, theoretical results are ambiguous. We use a large Belgian data set to analyze whether price changes are staggered or synchronized. We find that the more aggregated are the data, the closer is the price changing pattern to perfect staggering. This result holds both for aggregation across goods, and across locations. Our results provide support for Bhaskar’s (2002) model of synchronized adjustment within, and staggered adjustment across, industries.
Discussion of: Lumpy Price Adjustments: A Microeconometric Analysis
by Emmanuel Dhyne, Catherine Fuss, Hashem Pesaran and Patrick Sevestre, National Bank of Belgium International Conference on "Price and Wage Rigidities in an Open Economy", Brussels, October 12, 2006.
Inflation And Costly Price Adjustment: A Study of Canadian Newspaper Prices,
joint with Timothy C.G. Fisher, Journal of Money, Credit and Banking, Vol. 38, No. 3 (April 2006), 615-33. The paper studies the effect of inflation on price behaviour using price data from Canadian daily newspapers. We test the Sheshinski-Weiss (1977) monopoly price adjustment model on a sample of monopolistic as well as oligopolistic newspapers, in contrast to earlier studies that used data from oligopolistic or monopolistically competitive markets. The results depend crucially on the assumptions about how often the firm collects information and revises its optimal pricing policy. With infrequent policy revisions, the results for monopoly newspapers support the model. The results for oligopoly newspapers are similar.
Inflation and Price Setting in a Natural Experiment,
joint with Andrzej Skrzypacz, Journal of Monetary Economics, 52 (2005), April, 621–632
We analyze the behavior of price setters in Poland during the transition from a planned to a market economy, using a large disaggregated data set. The size and frequency of price changes, as well as relative price variability, all increase as inflation rises. The effect of expected inflation on relative price variability is much stronger than the effect of unexpected inflation. Despite the unusual economic environment, the results are qualitatively identical, and quantitatively stronger, than those in Lach and Tsiddon (1992).
A longer version of the paper is
here.
Comment on: Price-setting behaviour in the euro area: summary evidence from producer price micro data,
by Micro-PPI Team, Inflation Persistence in the Euro Area conference, European Central Bank, Frankfurt am Main 10-11 December 2004.
Costly Price Adjustment: Theory, Evidence and Prospects.
Notes from a Plenary Address at the European Association for Economics and Finance conference, Bologna, May 2003.
Canada Should Opt for a Common Currency with the US. Others will Follow.
Notes from a panel on Common Currency Issues at the European Association for Economics and Finance conference, Bologna, May 2003.
Some Benefits of Reducing Inflation in Transition Economies, joint with Monika Blaszkiewicz, Anna Myslinska and Przemyslaw Wozniak,July 2003.
We apply Feldstein’s (1997, 1999) analysis of the interactions between the tax system and inflation to two transition economies: Poland and Ukraine. We find that the tax-related costs of inflation in these countries are significantly smaller than in mature market economies. Our analysis points out that the tax system in these two transition economies is superior to the tax system in developed market economies, as taxes on investment income are lower. It implies that transition countries should avoid replicating other tax systems and, instead, take advantage of the unique opportunity to design and entrench the features of their tax system which are superior to those in mature economies.
The Behaviour of Price Dispersion in a Natural Experiment,
joint with Andrzej Skrzypacz, July 2000.
We study the behavior of prices in Poland following the big-bang market reforms in 1990, using a large, disaggregated data set. Price differences within and across regions
are initially large but fall rapidly in the early stages of transition. For most goods, the
rapid decline ends within a year. Dispersion is low for goods which are expensive, are
bought frequently, constitute a large portion of household expenditures, and in markets
characterized by intensive search for the best price. Inflation and inflation variability
explain only part of the changes of price dispersion over time. The behavior of price
dispersion is consistent with search for the best price and arbitrage. Overall, prices
behave as economic theory predicts they would.
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