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Inflation and Price Setting

Paper Session

Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PDT)

Marriott Marquis, Malibu City
Hosted By: Central Bank Research Association & American Economic Association
  • Chair: Luca Dedola, European Central Bank

Exchange Rate Shocks and Quality Adjustments

Daniel Goetz
,
University of Toronto
Alexander Rodnyansky
,
University of Cambridge

Abstract

Do firms respond to cost shocks by reducing the quality of their products? Using microdata from a large Russian retailer that varies its offerings twice-yearly, we document that ruble devaluations are associated with a reduction in the observed material quality of products imported for resale, but that higher quality goods are also more profitable. We reconcile these facts using a simple multi-product sourcing model that features a demand system with expenditure switching, where more profitable products can be dropped more quickly after a cost shock. The estimated model shows that quality downgrading reduces average pass-through by 6% and has meaningful consequences for welfare.

Using the Retail Distribution to Impute Expenditure Shares

Alexis Antoniades
,
Georgetown University
Robert Feenstra
,
University of California-Davis
Mingzhi Xu
,
Peking University and NBER

Abstract

Online price data provide a new and rich source of information. But in the absence of information on quantities or expenditure, researchers will treat equally the prices and price behavior across all products within a product group. In doing so, they introduce significant measurement error and potential bias. In this paper, we address this limitation by presenting a simple methodological innovation that allows researchers to impute expenditure when expenditure is not known. With a retail model based on standard assumptions, we show that measures of the retail distribution — which can be computed solely from price observations — provide a good and theoretically consistent proxy for expenditure. Through a series of simulations that use scanner-level price and quantity in-formation on about 85% of the Fast Moving Consumer Goods sold in six Gulf countries,we show that treating all products equally introduces substantial measurement error and bias in the calculation of price stickiness, inflation, and international price differences. But we also show that adding information on the retail distribution reduces measurement error substantially in each of these exercises. Our findings also have important implications for the work of the International Comparison Program.

Monetary Policy, Firms' Inflation Expectations and Prices: Causal Evidence from Firm-Level Data

Marco Bottone
,
Bank of Italy
Alfonso Rosolia
,
Bank of Italy

Abstract

We empirically explore the direct and immediate response of firms’ inflation expectations to monetary policy shocks. We use the Bank of Italy’s quarterly Survey of Inflation and Growth Expectations, in operations since 2000, and compare average point inflation expectations of firms interviewed in the days following scheduled ECB Governing Council meetings with those of firms interviewed just before them; we then relate their difference to the change in nominal market interest rates recorded on Governing Council meeting days, a gauge of the unanticipated component of monetary policy communications. We find that unanticipated changes in market rates are negatively correlated in a statistically significant way with the difference in inflation expectations between the two groups of firms and that this effect becomes stronger since 2009. We do not find evidence that firms’ pricing plans are affected by these monetary policy shocks nor that firms perceive significant changes in the main determinants of their pricing choices.

News-Driven Inflation Expectations and Information Rigidities

Vegard Høghaug Larsen
,
Norges Bank and BI Norwegian Business School
Julia Zhulanova
,
BI Norwegian Business School
Leif Anders Thorsrud
,
Norges Bank and BI Norwegian Business School

Abstract

Using a large news corpus and machine learning algorithms we investigate the role played by the media in the expectations formation process of households, and conclude that the news topics media report on are good predictors of both inflation and inflation expectations. In turn, in a noisy information model, augmented with a simple media channel, we document that the time series features of relevant topics help explain the time-varying information rigidity among households. As such, we provide a novel estimate of state dependent information rigidities, and present new evidence highlighting media's role for understanding inflation expectations and information rigidities.
Discussant(s)
David Berger
,
Northwestern University
Alberto Cavallo
,
Harvard Business School
Olivier Coibion
,
University of Texas-Austin
Kristoffer Nimark
,
Cornell University
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles
  • L1 - Market Structure, Firm Strategy, and Market Performance