What We can Learn About the Behaviour of Firms from the Average Monthly Frequency of Price‐Changes: An Application to the UK CPI Data

Abstract

The monthly frequency of price-changes is a prominent feature of many studies of the CPI micro-data. In this paper, we see what the frequency implies for the behaviour of price-setters in terms of the cross-sectional distribution average of price-spell durations across firms. We derive a lower bound for the mean duration of price-spells averaged across firms. We use the UK CPI data at the aggregate and sectoral level and find that the actual mean is about twice the theoretical minimum consistent with the observed frequency. We construct hypothetical Bernoulli-Calvo distributions from the frequency data which we find can result in similar impulse responses to the estimated hazards when used in the Smets-Wouters (2003) model. 2 See Kehoe and Midrigan (2015) for a discussion of the US data. 3 See Alvarez and Lippi (2014) for the case of multi-product firms. 4 COICOP stands for 'Classification of Individual Consumption According to Purpose' and is an international standard used for constructing consumer price indexes (see e.g. UN Statistics division

The Impact of the 2008 Crisis on UK Prices: What We Can Learn from the CPI Microdata1

“…Over time, if a nominal price is fixed, it will drift away from the optimal flex price as inflation cumulates over time and is more likely to hit the critical (S,s) boundary and result in a price change. Annual inflation is a good measure, since 12 months is close to the cross-sectional mean of price spells in the UK, as estimated by Dixon and Tian (2017). 20 However, the key reason why we chose annual inflation rather than use a statistical criterion such as maximum likelihood to choose the optimal lag structure is behavioural.…”

“… Dixon and Tian (2017) used the same CPI data set over the period 1996–2007 to estimate the cross‐sectional distribution of durations of price spells and examine how this relates to the average frequency of price changes. …”

The Determinants of Price Rigidity in the UK: Analysis of the CPI and PPI Microdata and Application to Macrodata Modelling

“…UK. Other empirical studies on aspects of price setting behaviour have grown out of this, including Alvarez et al (2006), Álvarez and Burriel (2010), , , Costain and Nakov (2011), Vavra (2014) and Kara (2015) Berardi et al (2015), and Dixon and Tian (2017). The major contribution of this paper is to employ survival analysis (nonparametric, semi-parametric and parametric models) to understand how prices were set in the UK in the decade preceding the crisis.…”

“…(), Alvarez and Lippi (), Costain and Nakov (), Vavra () and Kara () Berardi et al . (), and Dixon and Tian ().…”

The Relationship Between Nominal Wage and Price Flexibility: New Evidence

“…Por un lado, la literatura en materia de precios ha llegado a un consenso sobre el elevado grado de heterogeneidad de la flexibilidad de precios en los distintos sectores/industrias de la economía. Véase, entre otros, Bils y Klenow (2004Klenow ( ),Álvarez et al (2006, Dixon y Tian (2017). Los probables factores que determinan esta heterogeneidad sectorial han sido estudiados por la Red de Persistencia de la Inflación (IPN, por sus siglas en inglés).…”