Attractive Prices and Euro-Rounding Effects on Inflation

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in NATIONAL BANK OF BELGIUM WORKING PAPERS -DOCUMENT SERIES ATTRACTIVE PRICES AND EURO-ROUNDING EFFECTS ON INFLATION _______________________________Luc AucremanneThe views expressed in this paper are those of the authors and do not necessarily reflect the views of the National Bank of Belgium. Editorial DirectorJan Smets, Member of the Board of Directors of the National Bank of Belgium Statement of purpose:The purpose of these working papers is to promote the circulation of research results (Research Series) and of analytical studies (Document Series) made within the National Bank of Belgium or presented by outside economists in seminars, conferences and colloquia organised by the Bank. The aim is to provide a platform for discussion. The opinions are strictly those of the authors and do not necessarily reflect the views of the National Bank of Belgium. AbstractApproximately 70% of Belgian consumer prices are to be considered as attractive prices, namely psychological prices, fractional prices -i. e. prices which are convenient to pay -and round prices. Conversion of these prices into euro generally leads to prices which are no longer attractive and it is very likely that retailers will round their prices to attractive euro prices. The public fears that rounding will be upward rather than symmetric.This paper simulates in the first instance a worst-case scenario, whereby all attractive BEF prices are systematically rounded up to the nearest attractive euro price. The effect on the consumer price index ranges from 0.54 to 0.72%. Such a scenario is however very unlikely, as factors such as competition on product markets, the currently prevailing demand conditions, the commitments made by organisations representing the enterprise sector and the vigilant attitude of consumers restrain the possibility of rounding up. In order to obtain a more realistic picture, the paper investigates in a second step whether rounding-up effects were found after the major change in VAT rates in April 1992. These effects seem marginal, although it should be acknowledged that it was difficult to isolate rounding effects from regular price changes. Any ex post assessment of the euro changeover will face a similar identification problem.

Price-Setting Behaviour in Belgium: What Can Be Learned from an Ad Hoc Survey ?

“…Taking a closer look at the trade sector, we find that both differences are even more pronounced for retail, with explicit contracts showing the very low average score of 1.3 and pricing thresholds getting a mean score of 2.3. For more details on the widespread use of attractive prices for Belgian consumer goods, we refer to Aucremanne and Cornille (2001) and Cornille (2003), while Aucremanne and Dhyne (2004b) and Álvarez and Hernando (2004) provide evidence that the use of pricing thresholds tends to coincide with a somewhat more sticky pricing behaviour for consumer goods.…”

One Currency, One Price? Euro Changeover‐Related Inflation in Estonia

“…However, given that price levels increase gradually most of the time as deflationary periods tend to be very rare, and given the menu costs, rational firms that are minimizing costs in the longer term should opt to round prices up rather than down, within reasonable limits. The empirical evidence indicates that rounding is indeed asymmetric (Aucremanne and Cornille, 2001;Folkertsma et al, 2002).An often-cited reason for the inflationary effect of a currency changeover is the 'rational inattention' of consumers (Ehrmann, 2006). The adoption of a new currency temporarily increases the costs of information-processing for consumers, for whom it becomes more costly to make decisions related to purchases of goods and services.…”

The Euro Changeover and Its Effects on Price Transparency and Inflation

“…Ercolani and Dutta (2007) show that certain sectors experienced substantial price increases. At least two explanations for increases in sectoral inflation have been proposed—menu costs (Hobijn, Ravenna, and Tambalotti 2006, Gaiotti and Lippi 2005) and asymmetric rounding to attractive prices (Aucremanne and Cornille 2001). Although these factors might have contributed to inflation, we argue that they are not the complete story.…”