Working Paper

The Effects of Price Endings on Price Rigidity: Evidence from VAT Changes

Abstract: We document a causal role for price endings in generating micro and macro price rigidity. Based on micro price data underlying the consumer price index in Israel, we document that most stores have a favored price ending?a final digit, usually a zero or nine, used by a majority of prices in that store?and that these favored price endings are utilized extensively. Using changes to the VAT rate as exogenous cost shocks that affect prices regardless of ending, we find that the frequency of price adjustment for nonfavored endings increases by twice as much as the frequency of adjustment for favored endings in months when the VAT rate changes. In the aggregate, sluggish pass-through of VAT rate changes is due to favored endings; changes in the VAT rate are passed through fully and immediately to nonfavored endings.

Keywords: sticky prices; favored price endings; zero-ending prices; nine-ending prices; pass-through entities;

JEL Classification: E3; L11;

https://doi.org/10.26509/frbc-wp-201924

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2019-11-12

Number: 19-24