The Patterns and Determinants of Price Setting in the Belgian Industry

SSRN Electronic Journal 05/2006; DOI: 10.2139/ssrn.1689552
Source: RePEc


We present a new approach to study empirically the effect of the introduction of the euro on currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice depends on the characteristics of both the currency and the country. We use unique quarterly panel data of Norwegian imports from OECD countries for the 1996-2006 period. One of the key findings is that the eurozone countries in trade with Norway have substantially increased their share of home currency invoicing after the introduction of the euro. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The econometric analysis shows a significant effect of euro introduction above and beyond the determinants of currency invoicing (i.e., inflation rate, inflation volatility, foreign exchange market size, and product composition). However, the rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility.

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    • "In a study conducted by the Bank of England, UK …rms named an increase in competition as the most important factor behind the increase in the frequency with which they changed their prices over the last decade (Greenslade and Parker, 2008). The positive link between the degree of competition and the frequency of price adjustment has also been con…rmed by empirical studies based on disaggregated price data (Cornille and Dossche, 2006; Álvarez et al., 2006; L½ unnemann and Matha, 2005, Geroski, 1992; Carlton, 1986). Álvarez, Burriel and Hernando (2005) …nd that the frequency of producer price changes increases with import penetration. "
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    ABSTRACT: The paper examines the impact of trade integration and product market competition on firms' price setting behaviour and the degree of price stickiness. The analysis is based on a New-Keynesian open-economy DSGE model with variable desired mark-ups and Calvo price setting in which the frequency of price adjustment is endogenised. The study demonstrates that trade integration and the resulting changes in competition affect the degree of strategic complementarity in firms' price setting decisions and the frequency with which firms change their prices, which determine the degree of real and nominal price rigidities respectively. The micro-founded macroeconomic model constructed explains the positive relationship between competition and the frequency of price adjustment evident from empirical studies and surveys of firms' price setting behaviour. By accounting for the impact of competition on firms' pricing policies, the study also provides new insights into the effects of global economic integration on the Phillips Curve and inflation dynamics.
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    • "Plus de 90% de la variance de l'in ‡ation est expliquée par le premier terme pour Klenow et Kryvtsov (2005), plus de 70% pour Baudry et al. (2005) et Dias et al. (2006). Le constat est identique sur les données de prix de production (Dias et al. (2006), Cornille et Dossche (2008) et Gautier (2008)). Au Mexique, Gagnon (2006) trouve une contribution faible (36%) dans un contexte de forte in ‡ation (1995-1999) et forte (84%) quand l'in ‡ation est relativement basse (Tableau 4b). "
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    ABSTRACT: Microeconomic price rigidity is one of the main assumptions of the neo-keynesian macroeconomic models. Firms are not able to adjust continuously their prices. In this paper, we make a synthesis of the main microeconomic price setting theoretical models and of their empirical counterparts. Price rigidity is often justified by two models : a first one assumes that prices are time-dependent. At each period, a constant proportion of firms can change their prices. A lot of recent empirical works provide estimates of this proportion and evaluate its stability over time. A second model assumes that prices are state-dependent. Firms have to pay an adjustment cost each time they change their price and it can be optimal to differ a price change. These adjustments costs are empirically measured and recent studies focus on the impact of these menu costs on the inflation process. Besides, in this paper, we show to which extent macroeconomic models are able to match microeconomic stylised facts and persistent macroeconomic dynamics.
    Revue d'économie politique 04/2008; Volume 119(3):323-372. DOI:10.2139/ssrn.1679783 · 0.06 Impact Factor
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    • "For instance, the existence of a positive association between the frequency of price change and the degree of competition has been documented on the basis of individual producer prices for Spain and Belgium [see Álvarez et al. (2005) and Cornille and Dossche (2006), respectively] and for Luxembourg using consumer prices [Lünnemann and Mathä (2005)]. "
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    ABSTRACT: This paper explores the role of a number of factors in explaining the heterogeneity in the degree of price stickiness across industries, on the basis of the information provided by surveys on pricing behavior conducted in nine euro area countries. The main focus is placed on the influence of competition on the degree of price flexibility. Our results suggest that the price setting strategies of the most competitive firms give them a greater capacity to react to shocks and make, in practice, for greater flexibility in their prices. The direct influence of market competition on price flexibility is corroborated by a cross-country cross-industry econometric analysis based on the information provided by surveys. This analysis also shows that the cost structure and demand conditions help to explain the degree of price flexibility. Finally, it suggests that countries in which product market regulation is more relevant are characterized by less price flexibility.
    SSRN Electronic Journal 11/2006; DOI:10.2139/ssrn.941317
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