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Luis J. Álvarez
Banco de España
Banco de Portugal
Banque Nationale de Belgique
De Nederlandsche Bank
European Central Bank
Hervé Le Bihan
Banque de France
Bank of Finland
Banque Centrale du Luxembourg
Abstract This paper summarises the vast evidence on micro price-setting recently obtained for euro area countries. We consider studies with micro data on consumer and producer prices, as well as survey information. The main ﬁndings are: (1) prices in the euro area are sticky and stickier than in the US; (2) downward price rigidity is only slightly more marked than upward price rigidity; (3) heterogeneity and asymmetries are observed in price-setting; and (4) the relevance of theories that explain price stickiness, such as implicit or explicit contracts, marginal costs, and coordination failure, is conﬁrmed, whereas menu costs, pricing thresholds, and costly information explanations are judged much less relevant by ﬁrms. (JEL: C25, D40, E31)
Acknowledgments: We are grateful to national statistical institutes for providing the individual price records, all co-authors of national papers, all members of the Eurosystem Inﬂation Persistence Network (IPN), especially Silvia Fabiani, Jordi Galí, Vitor Gaspar, Ignacio Hernando, Johannes Hoffmann, Thomas Mathä, Frank Smets, and Giovanni Veronese, as well as participants at the 2005 meeting of the European Economic Association, a CEMFI seminar, and the Université de Toulouse T2M 2006 conference for helpful comments and suggestions. The views expressed in this paper are those of the authors and do not necessarily reﬂect the views of the central banks with which they are afﬁliated. E-mail addresses: L. J. Álvarez: email@example.com; Emmanuel Dhyne: firstname.lastname@example.org; Marco Hoeberichts: email@example.com; Claudia Kwapil: firstname.lastname@example.org; Hervé Le Bihan: email@example.com; Patrick Lünnemann: firstname.lastname@example.org; Fernando Martins: email@example.com; Roberto Sabbatini: roberto.sabbatini@ bancaditalia.it; Harald Stahl: firstname.lastname@example.org; Philip Vermeulen: philip.vermeulen@ ecb.int; Jouko Vilmunen: jouko.vilmunen@bof.ﬁ
Journal of the European Economic Association
1. Germany. Section 3 presents interesting survey information and Section 4 concludes. the speed of adjustment of inﬂation to shocks to the economy is directly linked to the speed of price adjustment of individual agents. Luxembourg. . Italy. Germany. See the summaries by Dhyne et al. Belgium. Cecchetti 1986 or Carlton 1986). Portugal.2 These empirical analyses have been produced in the context of the Inﬂation Persistence Network (IPN). following Blinder et al. and Fabiani et al. France. Examples of price trajectories taken from the Belgian CPI and Italian PPI datasets are given in Figure 1. the Netherlands.. and Spain) were questioned about their price-setting practices. Such large data sets are particularly well-suited for the analysis of price-setting behaviour. and Spain) in the case of the PPI. and Spain) in the case of the CPI and 5 countries (Belgium. Portugal.576 Journal of the European Economic Association 1. In addition. Luxembourg. the Netherlands. Italy.g. Belgium. (1998). See Angeloni et al. (2005). More than 11. Germany. Vermeulen et al. Section 2 presents a set of stylised facts describing ﬁrms’ price-setting practices with CPI and PPI data. This contrasts with most previous micro-studies (e. This paper brings together original evidence on price-setting in the euro area based on recently available individual price data underlying ofﬁcial consumer (CPI) and producer (PPI) price indices. (2006) for a discussion of the implications of our ﬁndings for macroeconomic modeling and the design of monetary policy. a large research effort conducted by economists of the Eurosystem. 2. Available databases for consumer prices and producer prices contain several million monthly price quotes for 10 countries (Austria. as well as survey information. Finland. The remainder of the paper is organised as follows.1 However. The third source of information stems from surveys to ﬁrms. Introduction A better empirical understanding of individual price-setting is crucial for building macroeconomic models of inﬂation with adequate microeconomic foundations that may help in the design of monetary policy. which mostly focused on very speciﬁc products or markets. The typical CPI and PPI quantitative information used is the price trajectory associated to one particular product sold in one particular outlet (in the case of CPI) or by one speciﬁc manufacturing ﬁrm (in the case of PPI). Italy.000 ﬁrms from 9 countries (Austria. micro-founded macro models of inﬂation are typically based on highly stylised assumptions on ﬁrms’ pricing behaviour and implications for inﬂation dynamics depend on assumed micro price-setting. (2006). France. Portugal. (2005) and references to national papers on which they are based therein. because they have a comprehensive coverage of retail and manufacturing prices and extend over several years.
According to surveys. Third. have a higher market share in euro area countries than in the US (Pilat 1997). Firms Change their Prices Rather Infrequently. (ii) the structure and degree of competition of the distribution sector.. Moreover. Sticky Prices in the Euro Area 577 Figure 1. and (v) the composition of the consumption basket. respectively. Prices are in Belgian Francs and euro. In contrast. First. Note: Price trajectories from the Belgian CPI and Italian PPI databases (See Aucremanne and Dhyne 2004 and Sabbatini et al. frequencies of price adjustment do not differ substantially between the US and the 3 largest euro area countries. which change their prices less frequently than supermarkets (e.. 2005). Firms’ Price-setting Practices: Stylised Facts The following stylised facts emerge consistently in the different countries considered. Lünnemann and Wintr (2005) ﬁnd that in the euro area prices set on the Internet of products with high technological content change much more frequently than those sold by traditional channels. Next we consider each of these arguments. Examples of individual price trajectories. Producer prices in the euro area are adjusted slightly more frequently: around 20% are changed each month. small corner shops.g. Gertler. On average. price durations are also longer in the euro area than in the US. 15% of consumer prices are changed in a given month in the euro area compared to 25% in the US (Table 1). Second. These results are also in line with implied durations derived from New Keynesian Phillips curves for the euro area and the US by Galí.Álvarez et al. 2. and López-Salido (2001. (iii) price collecting methods by statistical institutes. there are methodological differences in price-collecting procedures . (iv) the frequency and magnitude of cost and demand shocks. 2004). 2003). Baudry et al. Several factors can be put forward to explain the discrepancy in the frequency of price changes between the euro area and the US: (i) the level and variability of inﬂation. both the level and the volatility of inﬂation in the sample period were somewhat higher in the US than in the euro area. These frequencies imply average price durations close to one year in the euro area and slightly above half a year in the US.
in contrast with the US. (1998) for the US. the Netherlands. Converted from original interval grouped ﬁgures. Price Adjustment is Heterogeneous Across Sectors.8 8. Luxembourg. Within trade. energy and food products are also characterised by more frequent price changes.8 13. and Spain. Italy.2 US 24. and Italy and are converted from original daily ﬁgures. In turn. to a lesser extent. The same ranking of product categories is also found in the US. † Vermeulen et al. Estimates correspond to the GDP deﬂator and are converted from original quarterly ﬁgures. Italy. This suggests that the frequency of price changes decreases with the degree of sophistication of the product.4 64. ‡ Fabiani et al. Measures of price stickiness in the euro area and the US (% per month unless otherwise stated). Italy. France. (2006) for the euro area. and Spain. Finally. Belgium.9 10.0 15. the degree of consumer price ﬂexibility is related to the volatility of input prices (Hoffmann and Kurz-Kim 2006) and differences in the .1 13. (2005) for the euro area and Blinder et al. and Spain. for non-energy industrial goods. Finally. Heterogeneity is found to be related to differences in costs and market competition. Germany. Fourth. prices of food and energy are changed more frequently than for other goods or services (Álvarez and Hernando 2005).3 7. ¶ Lünnemann and Wintr (2005). in line with CPI evidence.5–19.0 10.2 79. Portugal. Bils and Klenow (2004) for the US. as the expenditure share of the more ﬂexible components of the CPI is larger in the euro area than in the US.6 n.a 20. a higher variability of wages and other input prices in the US may help explain more frequent price changes than in the euro area. survey evidence points out that prices of services other than trade are stickier than those for manufacturing goods and trade. but infrequent for services and. CPI price changes are relatively frequent for energy and unprocessed food products. Speciﬁcally. Euro area refers to the aggregate of Austria.7 4. Portugal.8 6. differences in consumption patterns do not explain the price ﬂexibility gap. (2005). Germany. processed food products occupy an intermediate situation. by the different statistical institutes.Gertler. Finland. § Gali. As regards producer prices. 2003).3 Notes: ∗ Dhyne et al. whereas capital goods and durables are the stickier components. Euro area refers to the aggregate of Austria. Germany. Statistics CPI∗ PPI† Surveys‡ NKPC§ Internet prices¶ Frequency Average duration (months) Median duration (months) Frequency Frequency Average duration ( months) Average durations ( months) Frequency Euro area 15. price changes due to sales and promotions were not considered in most euro area countries.6 20. the Netherlands. Portugal.2–8. Firms that change their prices very frequently coexist with those keeping them constant for relatively long periods (Table 2). France.578 Journal of the European Economic Association Table 1. France. Luxembourg. Euro area corresponds to the aggregate of Belgium. For instance. Belgium. in particular. Euro area corresponds to the aggregate of Germany. and López-Salido (2001.
There is also sectoral heterogeneity in the size of price changes. Burriel. Sticky Prices in the Euro Area 579 Table 2.Álvarez et al. Particularly. See additional information in Table 1. Price Decreases are Common. the frequency of producer price changes is positively related to import penetration (Álvarez. ‡ Fabiani et al. Nevertheless. cost structure across sectors help explain differences in the degree of producer price ﬂexibility (Álvarez. and Hernando 2005 and Sabbatini et al. Mean sizes of PPI price increases and decreases are smaller than for the CPI. price decreases are relatively uncommon in the service sector. large sectoral discrepancies are again observed. 2006). Prices of unprocessed food products change by a large amount. consumer price ﬂexibility is positively related to the number of competitors and the frequency of price reductions is negatively affected by the market share (Lünnemann and Mathä 2005). This somewhat surprising fact is in line with the evidence obtained by Klenow and Kryvstov (2005) for the US and characterises all euro area countries. the size of CPI price decreases is also slightly larger than that of price increases. survey evidence shows that sectors in which the perceived degree of competition is high feature less sticky prices (Álvarez and Hernando 2005. (2006) for the euro area. † Vermeulen et al.2%) and decreases (10. Similarly. Around 40% of CPI and 45% of PPI monthly price changes are price decreases (Table 3). 2005). where only 1 price change out of 5 is a price reduction (Dhyne et al. (2005). Frequency of price changes by type of good (% per month). This may reﬂect that wages do not go down frequently. whereas energy prices . and Hernando 2005). In the US. Speciﬁcally. 2006). a result also found with survey data (Álvarez and Hernando 2005). labour intensity negatively affects the frequency of price adjustments—given that wages are typically changed once a year—whereas the share of costs of intermediate goods in variable costs affects it positively. Burriel. Moreover. (2005). Bils and Klenow (2004) for the US. Unprocessed food 28 48 Processed food 14 27 Durable goods 10 Trade 18 Non-energy industrial goods 9 22 Consumer non durable non food 12 Other services 11 CPI∗ Euro area US Energy 78 74 Services 6 15 Intermediate goods 22 Capital goods 9 PPI† Euro area Surveys ‡ Food 26 Goods 16 Energy 70 Euro area Notes: ∗ Dhyne et al.0%) are high relative to the inﬂation rate. Price Changes are Sizeable. Regarding market competition. The average size of price increases (8.
Competition and Price-setting Rules.3 8. CPI ∗ Euro area Frequency Average size Frequency Average size Frequency Frequency 8.2 14.2 5. they still possess some degree of pricesetting autonomy. there is no evidence that prices adjust faster upward than downward. the use of mark-up pricing increases as the perceived level of competition goes down. See additional information in Table 1. as expected. . The most important factors driving prices upward are labour and raw materials costs. mark-up pricing is the dominant pricing rule in the euro area (Table 4). (2005). change very often but by a limited amount. This is consistent with the pronounced variability of marginal costs and the large incidence of indirect taxation on these products.7 13. (2005). In addition. Surveys show that.9 10. Klenow and Kryvstov (2005) for the US.0 9.580 Journal of the European Economic Association Table 3. 3. † Vermeulen et al. As regards market conditions. Frequency and size of price increases and price decreases (% per month). in particular to demand ones. ﬁrms facing strong competitive pressures tend to adjust their prices more frequently. The time lag of a price reaction after a shock by the median ﬁrm lies between 1 and 3 months. or respond more quickly to cost shocks than to demand shocks. ranking third among the explanations for price increases. Furthermore. whereas changes in market conditions (in demand and competitors’ prices) matter more for price decreases. (2006) for the euro area. Asymmetries in Price Reaction to Shocks. Indeed. ﬁrms in highly competitive markets are more likely to respond to shocks. Furthermore. Surveys show that cost shocks are more relevant in driving prices upwards than downwards (Peltzman 2000).0 US 16.0 11. The Mechanics of Price-setting This section highlights some features of price-setting practices drawing on the survey evidence summarised in Fabiani et al. even though most ﬁrms operate in competitive environments.1 12. 1998).1 Price increases Price decreases PPI† Price increases Price decreases Notes: ∗ Dhyne et al. although these factors are less relevant in explaining price decreases. In addition. the competitor’s price is the most important factor explaining price decreases. Both aspects are in line with the evidence for the US (Blinder et al.
e. prices exhibit a seasonal pattern: Prices are more likely to be changed in January or in September. This may be interpreted as a sign of time dependence. Price reviewing rules Time-dependent State-dependent Both Source: Fabiani et al. and the euro-cash changeover (Dhyne et al.. present and future n. in response to market conditions). (2005). although seasonality in demand or costs could also lead to a seasonal pattern in price changes. where the share of ﬁrms following time-dependent rules is 40%.8 Demand 2.2 Financial costs 2. For instance. Use of price setting rules (percentages) Markup Competitors’ price Other 54 27 18 Importance of factors driving price decreases Costs of raw materials 2. Information set used in price reviews 34 20 46 Rule of thumb Past and present Present and future Past.4 Demand 2. Indirect evidence of time and state dependence is also found with CPI and PPI data.2 Source: Fabiani et al. Around one third follow pure time-dependent strategies. Survey evidence on price setting (mean scores. but change prices in the case of speciﬁc events predominate. Note: Mean scores correspond to a scale from 1 (not important) to 4 (very important). especially given that a fraction of retailers keep their prices unchanged for one year. as in Table 5. (2005). unless otherwise stated). . Information Set and Market Behaviour. Among these.9 Importance of factors driving price increases Costs of raw materials 3. Firms apply both time-dependent rules (i.1 Competitors’ price 2. Time-dependent versus State-dependent Price Reviewing. Sticky Prices in the Euro Area 581 Table 4.5 Financial costs 1.0 Competitors’ price 2. 34 48 n. Firms were also asked to report the information set used in reviewing their prices. These ﬁndings are in line with those obtained for the US. ﬁrms that mainly follow time-dependent rules.0 Labour costs 3. Survey evidence on price reviewing (percentages). whereas the rest use some sort of state-dependent rules (Table 5).e. the frequency of price adjustment or the probability of price change is generally found to be related to sectoral or aggregate price or wage developments.5 Labour costs 2. they review prices with a given periodicity) and statedependent rules (i. 2006).. with a view to determining the appropriateness of considering inﬂation a backward-looking variable. changes in indirect taxation. Moreover.Álvarez et al.a.a.
or as a forward-looking variable. pricing thresholds. CPI or wage growth indexation) in price-setting. as they try not to jeopardise customer relationships. Euro area (mean score) US (ranking) 4 5 2 1 12 3 6 8 Implicit contracts Explicit contracts Cost-based pricing Coordination failure Judging quality by price Temporary shocks Change non-price factors Menu costs Costly information Pricing thresholds 2. without necessarily taking any action. (2005).6 1. one third of ﬁrms make price decisions without using economic forecasts. The four most relevant theories underlying price stickiness do not concern the price review decision. Around one half of ﬁrms consider a large information set. Walsh. and costly information were not considered very relevant by respondents. as in the New Keynesian Philips curve. . alternative explanations such as menu costs. which are costly to renegotiate. (1998). However. These results are in line with US (Blinder et al. suggesting that the main impediment to price adjustments lies at the stage in which ﬁrms consider the possibility of changing the price. and coordination failure problems arising from the preference of ﬁrms not to change prices unless their competitors do so.1 2. the theory of implicit contracts ranks ﬁrst (Table 6). Further evidence that ﬁrms do not optimise when reviewing prices is available for Belgium. This could also partly explain the higher frequency of price changes observed in the US.g. marginal costs that vary too little when costs are an important determinant in ﬁrms’ pricing decisions. Portugal.4 2..6 Sources: Euro area: Fabiani et al. In contrast.0 1. which includes expectations about future economic developments. Other explanations considered as important by ﬁrms were explicit contracts.582 Journal of the European Economic Association Table 6.6 2. the theory of costly information received the lowest score in the euro area surveys. Theories of price stickiness. and Yates 2000). Main Theories of Price Stickiness.6 1. the traditional expectations-augmented Philips curve. 1998) and UK evidence (Hall. and Spain: Around 30% of ﬁrms use a rule of thumb (e.7 1.7 2. This result is consistent with the fact that 70% of ﬁrms have long-term relationships with their customers and may also explain why ﬁrms are more likely to increase their prices in response to cost shocks than to demand shocks. Among explanations about the reasons which prevent a prompt adjustment of prices. Luxembourg. although the existence of implicit or explicit contracts is considered less important in the US than in the euro area. US: Blinder et al. Indeed.6 2.
” ECB Working Paper No. Jordi Galí. Baudry. there is no apparent general downward price rigidity: Around 40% of price changes are decreases.” ECB Working Paper Series No. Second. Ignacio Hernando. Cecchetti. others. (1986).” Journal of Economic Perspectives. Pablo Burriel. 20. Rudd (1998). Giovanni Veronese. Alan. . Thomas Mathä. and coordination failure). Elie Canetti.” ECB Working Paper Series No.” European Economic Review. David E. Dennis W.” Journal of Econometrics. Luis J. First. “Some Evidence on the Importance of Sticky Prices.” Journal of Political Economy. Stephen (1986). Russell Sage Foundation. Claudia Kwapil. 522. and Jouko Vilmunen (2006). prices in the euro area are sticky and stickier than in the US.. “The Frequency of Price Adjustment: A Study of the Newsstand Prices of Magazines. the relevance of some theoretical explanations is conﬁrmed by survey analyses (explicit contracts. 947–985. and Sylvie Tarrieu (2004). Jordi. References Álvarez.” ECB Working Paper Series No. Conclusions The research summarised in this paper has produced numerous new empirical results on the characteristics and determinants of price-setting in the euro area. Álvarez. Luis J. “The Pricing Behaviour of Firms in the Euro Area: New Survey Evidence. Álvarez. 31. “Price-setting Behaviour in Spain: Evidence from Micro PPI Data. “Competition and Price Flexibility in the Euro Area. and costly information). Luis J.” Journal of the European Economic Association. 535. “Price Changes in the Euro Area and the United States: Some Stylized Facts from Individual Consumer Price Data. Roberto Sabbatini. marginal costs. Nicole Jonker. Patrick Sevestre. Patrick Lünnemann. 384. Mark. Michael Ehrmann. Hervé Le Bihan. Silvia. and Emmanuel Dhyne (2004). Bettina Landau. “Price Rigidity: Evidence from French CPI Micro-data. and Frank Smets (2006). Luc Aucremanne. Andrew Levin. Daniel Dias. Klenow (2004). Álvarez. Carlton. Lebow. 112. 331. 4(2–3). “New Evidence on Inﬂation Persistence and Price Stickiness in the Euro Area: Implications for Macro Models. “The Rigidity of Prices. “The Price-setting Behaviour of Spanish Firms: Evidence from Survey Data. Johannes Hoffmann. instead. Emmanuel. 1237–1270. Asking about Prices: A New Approach to Understanding Price Stickiness. Martine Druant. Aucremanne. The four most noticeable are the following. “European Inﬂation Dynamics. pricing thresholds. Sticky Prices in the Euro Area 583 4. Blinder. Fourth. Laurent. and David López-Salido (2001). Ignazio. Mark Gertler. 637–658. 2.” Mimeo. Luis J. 538. and Ad Stokman (2005). Fernando Martins. Banco de España.” American Economic Review. and Ignacio Hernando (2005). Angeloni.. Luc. and Ignacio Hernando (2005)..” ECB Working Papers Series No. Galí. Fabio Rumler. 76. 255–274. Claire Loupias. and Ignacio Hernando (2006). Fabiani.Álvarez et al. are judged much less relevant by ﬁrms (menu costs. Third. Hervé Le Bihan. Bils. and Jeremy B. there is evidence of heterogeneity and of asymmetries in price-setting that suggest the need to consider models with several sectors. Dhyne. “How Frequently Do Prices Change? Evidence Based on the Micro Data Underlying the Belgian CPI. and Peter J.
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