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HETEROGENEITY IN EXPECTATIONS, OFFICIAL INFORMATION AND PRICE-SETTING BEHAVIOR

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posted on 2023-08-04, 09:58 authored by Gustavo Rojas-Matute

How firms set their prices is of special importance in macroeconomics and, in particular, for monetary policy. This dissertation investigates price-setting behavior from two different perspectives and two different environments, from low inflation to hyperinflation. In Chapter 1, I point out that firms seem to pay more attention to GDP growth rates in economies with well-anchored inflation expectations than CPI inflation. I study how this heterogeneity affects price-setting behavior. I analyze three types of firms: those that only track GDP, those that only track CPI, and those that track both. The findings can be summarized as follows: (i) both GDP growth rate and CPI inflation expectations affect price-setting behavior but in opposite directions; (ii) the impact of long-run inflation expectations on price-setting behavior is more substantial than short-run expectations; (iii) in the presence of adjustment costs, the frequency of price changes of those firms that only track GDP growth rate is highly correlated with the series estimated by Nakamura et al., (2018) with data provided by the Bureau of Labor Statistics (BLS); (iv) in the short run, the output response to a monetary shock is larger while the price response is smaller in those firms that only track GDP growth rate than in those firms that only update CPI; (v) adjustment costs amplify monetary non-neutrality in only-GDP firms. If the aggregate effect is driven by ``only-GDP" firms, as suggested in (iii), the results are consistent with recent findings suggesting that the Phillips curve is flat (Del Negro et al., 2020, Hazell et al., 2020).In Chapter 2, I take advantage of a ``natural experiment" to study the impact of the lack of official information on price-setting behavior. In particular, I study a case between December 2015 and May 2019, when the Central Bank of Venezuela stopped releasing official economic statistics, including inflation rate, GDP, and balance of payments. Using a combination of data sets from the Billion Prices Project, I find that the lack of official information increases the size of price changes (intensive margin), leading the intensive margin to be the main driver of the variance of the inflation. The empirical results are confirmed with the calibration of a price-setting behavior model. The model suggests that the turning point occurred when the Central Bank started delaying the publications (2012-2014) before deciding to stop them entirely in 2015. These findings are groundbreaking because they occur in a context of hyperinflation where prices change very frequently and differ from the most recent literature that has shown that the extensive margin contributes the most during high inflation and hyperinflation (Alvarez et al., 2019, Gagnon, 2009). The evidence also suggests that, despite the surge of different non-official inflation indicators publicly available, firms rely on private sources.

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American University

Notes

Degree Awarded: Ph.D. Economics. American University

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http://hdl.handle.net/1961/auislandora:94951

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