PRICERIGIDITYANDPRICEDISPERSIONEVIDENCE.PDFVIP

* PRICE RIGIDITY AND PRICE DISPERSION: EVIDENCE FROM MICRO DATA Eyal Baharad The University of Haifa Benjamin Eden Vanderbilt University and The University of Haifa. August 2003 We use large unpublished data set about the prices by store of 381 products collected by the Israeli bureau of statistics during 1991-92 in the process of computing the CPI. On average 24% of the stores changed their price where the average is over products and months. Using the standard calculation this would imply that on average prices remain unchanged for 4.1 months. We argue that the standard calculation suffers from a large aggregation bias due to Jensens inequality and our best estimate suggests that prices remain unchanged on average for more than 7.5 months. We then assess the importance of price rigidity in generating price dispersion. We find no evidence that price rigidity as measured by the frequency of nominal price changes is related to price dispersion. We also find no evidence that a shock to the inflation rate increases price dispersion. These findings are not consistent with standard versions of the staggered price setting model but are roughly consistent with a simple version of the uncertain and sequential trade model. * This paper benefited from comments provided by the participants of the workshop at the Chicago Fed and by comments provided by Jeff Campbell. 1. INTRODUCTION There is a growing literature that attempts to use micro data for assesing the importance of price rigidity. Some examples are: Carlton (1986), Cecchetti (1986), Lach and Tsiddon (1992), Kashyap (1995), Eden (2001), Bils and Klenow (2002) and Crucini and Shintani (2002). The estimation of the length of the period for which prices remain unchanged is a main concern of this literature. Taylor (1999) summarized the literature by saying that on average prices remain unchanged for about a year. Bils and Klenow (2002, hereafter BK) use unpub