Lumpy Price Adjustments: A Microeconometric Analysis

Based on a reduced-form state-dependent pricing model with random thresholds, we specify and estimate a nonlinear panel data model with an unobserved factor representing the common cost or demand components of the unobserved optimal price. Using this model, we are able to assess the relative importance of common and idiosyncratic shocks in explaining the frequency and magnitude of price changes in the case of a wide variety of consumer products in Belgium and France. We find that the mean level and variability of the random thresholds are key for explaining differences across products in the frequency of price changes. We also find that the idiosyncratic shocks represent the most important driver of the magnitude of price changes. Supplementary materials for this article are available online.

[1]  A. Kashyap,et al.  Sticky Prices: New Evidence from Retail Catalogs , 1994 .

[2]  E. Jondeau,et al.  Aggregating Phillips Curves , 2007, SSRN Electronic Journal.

[3]  Andreas Worms,et al.  The Interest Rate and Credit Channels in Belgium: An Investigation with Micro-Level Firm Data , 2001, SSRN Electronic Journal.

[4]  Frédéric Lagneaux,et al.  Economic Importance of the Belgian Ports: Flemish Maritime Ports and Liège Port Complex - Report 2005 , 2007 .

[5]  Inessa Love,et al.  Investment, Protection, Ownership, and the Cost of Capital , 2000 .

[6]  J. Stock,et al.  Macroeconomic Forecasting Using Diffusion Indexes , 2002 .

[7]  Eytan Sheshinski,et al.  Optimum Pricing Policy under Stochastic Inflation , 1983 .

[8]  E. Dhyne,et al.  Sticky Prices in the Euro Area: A Summary of New Micro Evidence , 2005, SSRN Electronic Journal.

[9]  M. Hallin,et al.  The Generalized Dynamic-Factor Model: Identification and Estimation , 2000, Review of Economics and Statistics.

[10]  JEAN‐STÉPHANE Mésonnier.  The Reliability of Macroeconomic Forecasts Based on Real Interest Rate Gap Estimates in Real Time: An Assessment for the Euro Area , 2006 .

[11]  Ricardo J. Caballero,et al.  Price Stickiness in SS Models: New Interpretations of Old Results , 2007 .

[12]  Jonathan L. Willis.  Magazine Prices Revisited , 2001 .

[13]  Ferre De Graeve,et al.  The Determinants of Pass-Through of Market Conditions to Bank Retail Interest Rates in Belgium , 2004 .

[14]  Peter J. Klenow,et al.  Sticky Information and Sticky Prices , 2006 .

[15]  Gerdie Everaert,et al.  Measuring Inflation Persistence: A Structural Time Series Approach , 2005, SSRN Electronic Journal.

[16]  Frank Smets,et al.  Firm-Specific Production Factors in a DSGE Model with Taylor Price Setting , 2006, SSRN Electronic Journal.

[17]  Ricardo J. Caballero,et al.  Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,S) Approach , 1994 .

[18]  James D. Hamilton,et al.  Why Are Prices Sticky? The Dynamics of Wholesale Gasoline Prices , 2003 .

[19]  Emmanuel Dhyne,et al.  Time-Dependent versus State-Dependent Pricing: A Panel Data Approach to the Determinants of Belgian Consumer Price Changes , 2005, SSRN Electronic Journal.

[20]  Indirect ICT Investment , 2007 .

[21]  R. Bacon.  Rockets and feathers: the asymmetric speed of adjustment of UK retail gasoline prices to cost changes , 1991 .

[22]  Harald Stahl,et al.  Price Setting in the Euro Area: Some Stylised Facts from Individual Producer Price Data , 2007 .

[23]  N. Mankiw,et al.  Asymmetric Price Adjustment and Economic Fluctuations , 1992 .

[24]  P. Giot,et al.  An International Analysis of Earnings, Stock Prices and Bond Yields , 2005, SSRN Electronic Journal.

[25]  Ricardo J. Caballero,et al.  Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,S) Approach , 1994 .

[26]  Shantanu Dutta,et al.  Price Flexibility in Channels of Distribution: Evidence from Scanner Data , 2002 .

[27]  Saul Lach,et al.  Small price changes and menu costs , 2007 .

[28]  Mark E. Bergen,et al.  Asymmetric Price Adjustment in the Small: An Implication of Rational Inattention , 2005 .

[29]  Philippe Jeanfils,et al.  Noname - A New Quarterly Model for Belgium , 2005 .

[30]  Emmanuel Dhyne,et al.  How Frequently Do Prices Change? Evidence Based on the Micro Data Underlying the Belgian CPI , 2004, SSRN Electronic Journal.

[31]  Anthony D. Yates.  Downward Nominal Rigidity and Monetary Policy , 1998 .

[32]  S. Peltzman.  Prices Rise Faster than They Fall , 2000, Journal of Political Economy.

[33]  Daniel Tsiddon.  The (Mis)Behaviour of the Aggregate Price Level , 1993 .

[34]  A. Banerjee,et al.  Measuring Long-Run Exchange Rate Pass-Through , 2007 .

[35]  C. Fuss,et al.  The Impact of Uncertainty on Investment Plans , 2002 .

[36]  R. M. L. G. Veronese.  PRODUCER PRICE BEHAVIOUR IN ITALY : EVIDENCE FROM MICRO PPI DATA , 2004 .

[37]  Patrick J. G. Van Cayseele,et al.  Financial Consolidation and Liquidity: Prudential Regulation And/Or Competition Policy? , 2004 .

[38]  Georges Hübner,et al.  NATIONAL BANK OF BELGIUM WORKING PAPERS-RESEARCH SERIES DEVELOPMENT PATH AND CAPITAL STRUCTURE OF BELGIAN BIOTECHNOLOGY FIRMS , 2002 .

[39]  Joris Pinkse,et al.  Spatial Price Competition: A Semiparametric Approach , 2002 .

[40]  Frédéric Lagneaux,et al.  Importance économique du Port Autonome de Liège: rapport 2002 , 2004 .

[41]  Y. Crama,et al.  Basel II and Operational Risk: Implications for Risk Measurement and Management in the Financial Sector , 2004 .

[42]  Jean Boivin,et al.  DSGE Models in a Data-Rich Environment , 2006 .

[43]  Janet Mitchell,et al.  Financial Intermediation Theory and Implications for the Sources of Value in Structured Finance Markets , 2005 .

[44]  Gregory Connor,et al.  Performance Measurement with the Arbitrage Pricing Theory: A New Framework for Analysis , 1985 .

[45]  Leslie E. Papke,et al.  Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates , 1993 .

[46]  Stan Maes,et al.  Modeling the Term Structure of Interest Rates: Where Do We Stand? , 2003 .

[47]  D. Fougère,et al.  Restaurant Prices and the Minimum Wage , 2008, SSRN Electronic Journal.

[48]  P. Sevestre,et al.  Heterogeneity in Consumer Price Stickiness , 2007 .

[49]  Olivier J. Blanchard,et al.  A New Keynesian Model with Unemployment , 2006 .

[50]  Thomas Heckel,et al.  Sticky Wages: Evidence from Quarterly Microeconomic Data , 2008 .

[51]  M. Pesaran.  General diagnostic tests for cross-sectional dependence in panels , 2004, Empirical Economics.

[52]  Attila Rátfai.  Linking Individual and Aggregate Price Changes , 2006 .

[53]  Virgiliu Midrigan.  Menu Costs, Multi-Product Firms and Aggregate Fluctuations , 2011 .

[54]  J. Idier,et al.  Determinants of Long-Term Interest Rates in the United States and the Euro Area: A Multivariate Approach , 2007 .

[55]  D. Romer,et al.  Inflation and the Informativeness of Prices , 1993 .

[56]  Roland Ricart,et al.  Price Setting in France: New Evidence from Survey Data , 2004, SSRN Electronic Journal.

[57]  Olivier Loisel.  Bubble-Free Interest-Rate Rules , 2006 .

[58]  Luc Aucremanne,et al.  The Use of Robust Estimators as Measures of Core Inflation , 2000 .

[59]  F. Smets,et al.  Differences in Interest Rate Policy at the ECB and the Fed: An Investigation with a Medium-Scale DSGE Model , 2007 .

[60]  Denis Fougère.  Les méthodes micro-économétriques d’évaluation , 2007 .

[61]  J. Alho,et al.  Global Ageing and Macroeconomic Consequences of Demographic Uncertainty in a Multi-Regional Model , 2007 .

[62]  Michele Cincera,et al.  Financing Constraints, Fixed Capital and R&D Investment Decisions of Belgian Firms , 2002 .

[63]  Christian Ewerhart,et al.  Financial Market Liquidity and the Lender of Last Resort , 2007 .

[64]  R. Kierzenkowski,et al.  L’évolution des crédits à l’habitat en France: une grille d’analyse en termes de cycles , 2007 .

[65]  Mia Hubert,et al.  Inflation, Relative Prices and Nominal Rigidities , 2002 .

[66]  Koen Burggraeve,et al.  The Labour Market and Fiscal Impact of Labour Reductions: The Case of Reduction of Employers' Social Security Contributions Under a Wage Norm Regime with Automatic Price Indexing of Wages , 2003 .

[67]  Per Svejstrup Hansen.  Frequent price changes under menu costs , 1999 .

[68]  Avinash Dixit,et al.  Analytical Approximations in Models of Hysteresis , 1991 .

[69]  Hervé Le Bihan,et al.  Price Changes in the Euro Area and the United States: Some Facts from Individual Consumer Price Data , 2006 .

[70]  Jean-Jacques Vanhaelen,et al.  The Belgian Industrial Confidence Indicator: Leading Indicator of Economic Activity in the Euro Area? , 2000 .

[71]  Elisa Tosetti,et al.  Large Panels with Common Factors and Spatial Correlations , 2007, SSRN Electronic Journal.

[72]  Pierre Giot,et al.  How Does Liquidity React to Stress Periods in a Limit Order Market? , 2004 .

[73]  Understanding Asset Prices: Determinants and Policy Implications , 2007 .

[74]  V. Réquillart,et al.  Imperfect competition in the fresh tomato industry , 2008 .

[75]  Gregory Connor,et al.  Risk and Return in an Equilibrium Apt: Application of a New Test Methodology , 1988 .

[76]  Joseph Plasmans,et al.  Simulation, Estimation and Welfare Implications of Monetary Policies in a 3-Country NOEM Model , 2006 .

[77]  Stephen G. Cecchetti.  The frequency of price adjustment: A study of the newsstand prices of magazines , 1986 .

[78]  Hans Degryse,et al.  Interbank Exposures: An Empirical Examination of Systemic Risk in the Belgian Banking System , 2004 .

[79]  Mark J. Zbaracki,et al.  Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets , 2004 .

[80]  M. Dossche,et al.  Some Evidence on the Adjustment of Producer Prices , 2008 .

[81]  G.J.C.M. van Gastel,et al.  «De autonijverheid in België: Het belang van het toeleveringsnetwerk rond de assemblage van personenauto's» , 2003 .

[82]  Emi Nakamura,et al.  Five Facts about Prices: A Reevaluation of Menu Cost Models , 2008 .

[83]  N. Jonker,et al.  An Empirical Analysis of Price Setting Behavior in the Netherlands in the Period 1998-2003 Using Micro Data , 2004, SSRN Electronic Journal.

[84]  Luc Aucremanne,et al.  Price-Setting Behaviour in Belgium: What Can Be Learned from an Ad Hoc Survey ? , 2005 .

[85]  M. Pesaran.  Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure , 2004, SSRN Electronic Journal.

[86]  G. Calvo.  Staggered prices in a utility-maximizing framework , 1983 .

[87]  J. Idier.  Stock Exchanges Industry Consolidation and Shock Transmission , 2006 .

[88]  A. Durre,et al.  Stock Market Valuation in the United States , 2003 .

[89]  Mia Hubert,et al.  WORKING PAPERS - RESEARCH SERIES INFLATION, RELATIVE PRICES AND NOMINAL RIGIDITIES , 2002 .

[90]  F. Rycx,et al.  Industry Wage Differentials, Unobserved Ability, and Rent-Sharing: Evidence from Matched Worker-Firm Data, 1995-2002 , 2006 .

[91]  Silvia Fabiani,et al.  Consumer Price Behaviour in Italy: Evidence from Micro CPI Data , 2005, SSRN Electronic Journal.

[92]  S. Borenstein,et al.  Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes , 1997 .

[93]  Philippe Moës,et al.  The production function approach to the Belgian output gap, estimation of a multivariate structural time series model , 2006 .

[94]  Giovanni Veronese,et al.  Price Setting in the Euro Area: Some Stylized Facts from Individual Consumer Price Data , 2005, SSRN Electronic Journal.

[95]  Robert G. King,et al.  State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output , 1999 .

[96]  Frank Smets,et al.  Comparing Shocks and Frictions in Us and Euro Area Business Cycles: A Bayesian DSGE Approach , 2004, SSRN Electronic Journal.

[97]  Hans Degryse,et al.  Interbank Exposures: An Empirical Examination of Contagion Risk in the Belgian Banking System , 2012 .

[98]  Charles Wyplosz.  Economic Growth and the Labor Markets: Europe's Challenge , 2000 .

[99]  Saul Lach,et al.  The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregat Price Data , 1992, Journal of Political Economy.

[100]  M. Woodford.  Information-Constrained State-Dependent Pricing , 2008 .

[101]  Serena Ng,et al.  Evaluating latent and observed factors in macroeconomics and finance , 2006 .

[102]  Harald Stahl,et al.  The Pricing Behaviour of Firms in the Euro Area: New Survey Evidence , 2005, SSRN Electronic Journal.

[103]  Benoît Robert,et al.  La consommation privée en Belgique , 2003 .

[104]  H. Dewachter,et al.  A Multi-Factor Model for the Valuation and Risk Management of Demand Deposits , 2006 .

[105]  Jonas D. M. Fisher,et al.  Estimating the frequency of price re-optimization in Calvo-style models , 2007 .

[106]  Ivo Maes,et al.  On the Origins of the Franco-German EMU Controversies , 2002 .

[107]  Janet Mitchell,et al.  Smes and Bank Lending Relationships: The Impact of Mergers , 2004 .

[108]  Frank Smets,et al.  Forecasting with a Bayesian DSGE Model: An Application to the Euro Area , 2004, SSRN Electronic Journal.

[109]  Mikhail Golosov,et al.  Menu Costs and Phillips Curves , 2003, Journal of Political Economy.

[110]  Patrick J. G. Van Cayseele,et al.  Investment, R&D and Liquidity Constraints , 2002 .

[111]  N. Mankiw,et al.  Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve , 2001 .

[112]  C. Fuss,et al.  Firms’ investment decisions in response to demand and price uncertainty , 2004, SSRN Electronic Journal.

[113]  Emi Nakamura.  Pass-Through in Retail and Wholesale , 2008 .

[114]  Frédéric Verschueren,et al.  Finance, Uncertainty and Investment: Assessing the Gains and Losses of a Generalized Non Linear Structural Approach Using Belgian Panel Data , 2002 .

[115]  Maureen O’Hara,et al.  Liquidity and Financial Market Stability , 2004 .

[116]  Philippe Moës,et al.  Asymetric Growth and Inflation Developments in the Acceding Countries: A New Assessment , 2004 .

[117]  Frederique Savignac,et al.  The Impact of Financial Constraints on Innovation: What Can Be Learned from a Direct Measure? , 2007 .

[118]  Ronald MacDonald,et al.  The Role of the Exchange Rate in Economic Growth: A Euro-Zone Perspective , 2000 .

[119]  Ricardo J. Caballero.  Price Stickiness in Ss Models: Basic Properties , 2006 .

[120]  Carlos M. Carvalho.  Heterogeneity in Price Stickiness and the New Keynesian Phillips Curve , 2006 .

[121]  A. Blinder,et al.  Asking About Prices: A New Approach to Understanding Price Stickiness , 1998 .

[122]  Christian Ewerhart,et al.  Forced Portfolio Liquidation , 2007 .

[123]  Jérôme Coffinet,et al.  Euro Area Market Reactions to the Monetary Developments Press Release , 2007, SSRN Electronic Journal.

[124]  François Coppens,et al.  The Single European Electricity Market: A Long Road to Convergence , 2006 .

[125]  I. Visco,et al.  Knowledge, Technology and Economic Growth: an OECD Perspective , 2000 .

[126]  C. Sims.  Implications of rational inattention , 2003 .

[127]  E. Jondeau,et al.  Testing Heterogeneity within the Euro Area , 2008 .

[128]  Harald Stahl,et al.  Time-Dependent or State-Dependent Price Setting? Micro-Evidence from German Metal-Working Industries , 2005, SSRN Electronic Journal.

[129]  Daniel Hosken,et al.  Patterns of Retail Price Variation , 2004 .

[130]  Jean-Paul Renne,et al.  Does Uncertainty Make a Time-Varying Natural Rate of Interest Irrelevant for the Conduct of Monetary Policy? , 2007 .

[131]  Philippe Jeanfils,et al.  Réduction linéaire de cotisations patronales à la sécurité sociale et financement alternatif , 2006 .

[132]  M. Dias,et al.  Stylised Features of Price Setting Behaviour in Portugal: 1992-2001 , 2004, SSRN Electronic Journal.

[133]  F. Smets,et al.  Inflation Persistence and Price-Setting Behaviour in the Euro Area - a Summary of the Ipn Evidence , 2006, SSRN Electronic Journal.

[134]  Eytan Sheshinski,et al.  Inflation and Costs of Price Adjustment , 1977 .

[135]  F. Lagneaux.  Economic Importance of the Flemish Maritime Ports - Report 2002 , 2004 .

[136]  Olivier Darné,et al.  L’indicateur synthétique mensuel d’activité (ISMA) : une révision , 2007 .

[137]  David de la Croix,et al.  Dynamics and Monetary Policy in a Fair Wage Model of the Business Cycle , 2007 .

[138]  C. Fuss,et al.  The Response of Firms' Investment and Financing to Adverse Cash Flow Shocks: The Role of Bank Relationships , 2006 .

[139]  Rafael Wouters,et al.  Nominal Wage Rigidities in a New Keynesian Model with Frictional Unemployment , 2006 .

[140]  C. V. Nieuwenhuyze,et al.  A Generalised Dynamic Factor Model for the Belgian Economy - Useful Business Cycle Indicators and GDP Growth Forecasts , 2006 .

[141]  Luc Aucremanne,et al.  Attractive Prices and Euro-Rounding Effects on Inflation , 2001 .

[142]  M. Bergen,et al.  The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains , 1997 .

[143]  I. Maes,et al.  The Process of European Monetary Integration: A Comparison of the Belgian and Italian Approaches , 2003 .

[144]  Jean-Bernard Chatelain,et al.  Structural Modelling of Investment and Financial Constraints: Where Do We Stand? , 2002, SSRN Electronic Journal.

[145]  Erwan Gautier,et al.  The Behaviour of Producer Prices: Some Evidence from the French PPI Micro Data , 2006, SSRN Electronic Journal.

[146]  V. Marimoutou,et al.  Is There a Structural Break in Equilibrium Velocity in the Euro Area? , 2007 .

[147]  A. Van Landschoot,et al.  Determinants of Euro Term Structure of Credit Spreads , 2004, SSRN Electronic Journal.

[148]  Quentin Wibaut.  Politique monetaire et prix des actifs: le cas des Etats-Unis , 2000 .

[149]  Philippe Jeanfils,et al.  A Guided Tour of the World of Rational Expectations Models and Optimal Policies , 2001 .

[150]  P. Sevestre,et al.  What Do Thirteen Million Price Records Have to Say About Consumer Price Rigidity? , 2007 .

[151]  J. Idier,et al.  Probability of Informed Trading: An Empirical Application to the Euro Overnight Market Rate , 2007 .

[152]  R. N. Rosett.  A Statistical Model of Friction in Economics , 1959 .

[153]  M. Emiris.  Sectoral vs. Country Diversification Benefits and Downside Risk , 2004 .

[154]  M. Dossche,et al.  The Patterns and Determinants of Price Setting in the Belgian Industry , 2006, SSRN Electronic Journal.

[155]  Roland Ricart,et al.  Price-setting in the French manufacturing sector: new evidence from survey data , 2006 .

[156]  Jeffrey R. Campbell,et al.  Rigid Prices: Evidence from U.S. Scanner Data , 2010 .

[157]  Carlos Carvalho,et al.  Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks , 2006 .

[158]  J. Rotemberg.  The Benevolence of the Baker: Fair Pricing under the Threat of Customer Anger , 2003 .

[159]  Harald Stahl,et al.  What Firms' Surveys Tell Us about Price-Setting Behavior in the Euro Area , 2006 .

[160]  Anthony D. Yates,et al.  Are There Downward Nominal Rigidities in Product Markets? , 1998 .

[161]  J. Bai,et al.  Determining the Number of Factors in Approximate Factor Models , 2000 .

[162]  C. Jardet,et al.  Euro Money Market Interest Rates Dynamics and Volatility: How They Respond to Recent Changes in the Operational Framework , 2007 .

[163]  Jozef Konings,et al.  Price and Wage Setting in an Integrating Europe: Firm Level Evidence , 2006 .

[164]  H. Partouche.  Time-Varying Coefficients in a GMM Framework: Estimation of a Forward Looking Taylor Rule for the Federal Reserve , 2007 .

[165]  Filippo Altissimo,et al.  "Inflation persistence and price-setting behaviour in the euro area: a summary of the Inflation Persistence Network evidence." NBB Working Paper No. 95, October 2006 , 2006 .