The patterns and determinants of price setting in the Belgian industry

SSRN Electronic Journal 01/2006; DOI: 10.2139/ssrn.1689552
Source: RePEc

ABSTRACT 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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    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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    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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    ABSTRACT: This paper presents a simple model of state-dependent pricing that allows identification of the relative importance of the degree of price rigidity that is inherent to the price setting mechanism (intrinsic) and that which is due to the price’s driving variables (extrinsic). Using two data sets consisting of a large fraction of the price quotes used to compute the Belgian and French CPI, we are able to assess the role of intrinsic and extrinsic price stickiness in explaining the occurrence and magnitude of price changes at the outlet level. We find that infrequent price changes are not necessarily associated with large adjustment costs. Indeed, extrinsic rigidity appears to be significant in many cases. We also find that asymmetry in the price adjustment could be due to trends in marginal costs and/or desired mark-ups rather than asymmetric cost of adjustment bands.
    Journal of Business and Economic Statistics 06/2007; 29(4):529-540. DOI:10.2139/ssrn.1688935 · 2.32 Impact Factor

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