Working Paper

On what states do prices depend? answers from ecuador


Abstract: In this paper, we argue that differences in the cost structure across sectors play an important role in the decision of firms to adjust their prices. We develop a menu cost model of pricing in which retail firms intermediate trade between producers and consumers. An important facet of our analysis is that the labor-cost share of retail production differs across goods and services in the consumption basket. For example, the price of gasoline at the retail pump is predicted to adjust more frequently and by more than the price of a haircut due to the high volatility in wholesale gasoline prices relative to the wages of unskilled labor, even when both retailers face a common menu cost. This modeling approach allows us to account for some of the cross-sectional differences observed in the frequency of price adjustments across goods. We apply this model to Ecuador to take advantage of inflation variations and the rich panel of monthly retail prices.

JEL Classification: E3; E5; F3; F33;

https://doi.org/10.24149/gwp278

Access Documents

File(s): File format is application/pdf http://www.dallasfed.org/assets/documents/institute/wpapers/2016/0278.pdf
Description: Full text

Authors

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2016-08-12

Number: 278

Pages: 25 pages