Linking individual and aggregate price changes

Attila Rátfai*

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    Abstract (may include machine translation)

    This paper studies the implications of lumpiness and heterogeneity in microeconomic pricing decisions for dynamics in price aggregates. To capture the latent deviation between actual and target prices, it develops a semi-structural empirical model of two-sided (S,s) price setting. Applying the model to a unique panel of store level retail prices reveals that fluctuations in the shape of cross-sectional price deviation densities contain extra information on aggregate price change dynamics. Asymmetry in the density particularly matters. Idiosyncratic shocks magnify the size, but do not alter the direction of aggregate fluctuations. When the target price is proxied by the cross-store mean price, the link between inflation and the price deviation density disappears.

    Original languageEnglish
    Pages (from-to)2199-2224
    Number of pages26
    JournalJournal of Money, Credit and Banking
    Volume38
    Issue number8
    DOIs
    StatePublished - Dec 2006

    Keywords

    • (S,s) pricing
    • Inflation
    • Microeconomic price data
    • Simulated maximum likelihood estimation

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