What Determines Price Changes and the Distribution of Prices? Evidence from the Swiss CPI.

Abstract

This paper examines how firms set and adjust their prices, depending on macroeconomic, sectoral and individual conditions. A large panel of 345,963 observations of quarterly firm and product price data, underlying the Swiss sectoral CPIs from 1993 to 2012, is used for this purpose. The data allows us to trace the pricing decisions of the identified firm over time and in detail (without regular interruption of the price series as in the case of the US CPI). Among several macroeconomic factors, the appreciation of the Swiss franc results in an increase in the probability of a positive price change and, to a lesser extent, in the size of price changes. Singling out one policy measure, we found that an increase in the VAT is over-proportionally shifted to prices by firms who change their prices. Finally, the data set allows for the analysis of the development of price dispersion at the product level. We can demonstrate that an increase in the VAT led to a decrease in the variance in prices, whereas macroeconomic factors have no impact.