Template-Type: ReDIF-Paper 1.0
Author-Name: Konstantins Benkovskis
Author-X-Name-First: Konstantins
Author-X-Name-Last: Benkovskis
Author-Workplace-Name: Bank of Latvia
Author-Name: Ludmila Fadejeva
Author-X-Name-First: Ludmila
Author-X-Name-Last: Fadejeva
Author-Workplace-Name: Bank of Latvia
Author-Name: Krista Kalnberzina
Author-X-Name-First: Krista
Author-X-Name-Last: Kalnberzina
Author-Workplace-Name: Bank of Latvia
Title: Price Setting Behaviour in Latvia: Econometric Evidence from CPI Microdata
Abstract: This paper discovers the driving forces behind firms' decisions to adjust prices by using various panel logit models, which explain the probability of observing price change by a broad set of exogenous variables. The results of the models show that the consumer price formation in Latvia is a combination of both state-dependent and time-dependent behaviour. On the one hand, frequency of price changes depends on inflation, demand conditions, and the size of last price changes. On the other hand, we observe some elements of time-dependent price setting, e.g. price truncation and strong seasonal pattern. We also find several important differences in the price setting behaviour for cases of price increases and decreases. The fact that frequency of price changes in Latvia depends on inflation as well as demand and supply conditions could be seen as a prerequisite for faster price adjustment process in the event of distortions in the economy. In the case of economic imbalances, statedependent price formation changes flexibility of prices and ensures a faster adjustment process towards equilibrium.
Creation-Date: 2011-01-28
File-URL: https://www.bank.lv/images/stories/pielikumi/publikacijas/petijumi/WP_1-2011-Benk-Kalnb-Fadejeva.pdf
File-Format: Application/pdf
File-URL: https://www.macroeconomics.lv/sites/default/files/wp_1-2011-benk-kalnb-fadejeva.pdf
File-Format: Application/pdf
Number: 2011/01
Classification-JEL: C23, D40, E31
Keywords: price setting behaviour, Latvia's consumer prices, frequency of price
change, sales, time-dependent pricing, state-dependent pricing, panel logit model
X-File-Ref: https://repec.bank.lv/refs/wpaper201101.txt
Handle: RePEc:ltv:wpaper:201101