Frequency of Price Adjustments: New Facts About Prices Open Access

Zabelina, Margarita (2016)

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I examine frequency of price adjustments using aggregate and micro data. In the first part I examine stability of Calvo pricing. An increasing literature has been concerned that the dynamics of the economy keeps switching and that, in particular, it is important to allow time variation in the degree of Calvo stickiness. We investigate this with a Markov- switching Dynamic Stochastic General Equilibrium model and show that there is little gain when allowing for such time variation. As a result we recommend to use a constant Calvo stickiness parameter, even when allowing for regime shifts elsewhere. In the second part, using Mexican CPI data from 1994 to 2002 covering the period of large peso devaluation, I document a number of novel facts: First, the duration of prices differs between categories of goods and across economic conditions. Frequency of price adjustments and rankings of categories of goods by these frequency in Mexico differs from those in U.S. Second, a large shock to the firms marginal cost increases the frequency of price adjustments for all goods. This increase is particularly large for goods with a very stable price history. Third, frequency of price adjustments of nondurables and services increases with increase in market and firm's elasticity of demand. This relationship is opposite for durables. Standard ways of modeling frequency of price adjustments do not support these findings.

Table of Contents

Chapter 1. On the stability of Calvo-style Price-Setting Behavior 1

I. Introduction 2

II. A Markov-switching rational expectations model 8

III. Estimation Method 13

IV. Were there changes in the frequency of price adjustment? 15

V. Is the Calvo pricing parameter policy invariant? 29

VI. Conclusion 35

1.A. Markov-switching DSGE model: Solution and Estimation 36

1.B. Data 40

1.C. Marginal Data Densities 40

1.D. Tables 46

1.E. Figures 51

Chapter 2. Market power and the Frequency of Price Adjustments: New Facts from Mexico 58

I. Introduction 59 I

I. Data 65

III. Facts about frequency of price adjustments: data 66

IV. Facts about frequency of price adjustments: relationships 70

V. Model 75

VI. Conclusion 79

2.A. Tables 81

2.B. Figures 84

Bibliography 91

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