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What We can Learn About the Behaviour of Firms from the Average Monthly Frequency of Price‐Changes: An Application to the UK CPI Data
Author(s) -
Dixon Huw David,
Tian Kun
Publication year - 2017
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12173
Subject(s) - econometrics , economics , aggregate (composite) , price level , aggregate data , volatility (finance) , statistics , mathematics , macroeconomics , materials science , composite material
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.