Analyses of a large retail scanner price data set reveal a new and surprising regularity - small price increases occur more frequently than small price decreases for price changes of up to 10¢. That is, we find asymmetric price adjustment "in the small." Furthermore, it turns out that inflation offers only a partial explanation for the finding. Indeed, substantial proportion of the asymmetry remains unexplained, even after accounting for the inflation. For example, the asymmetry holds also after excluding periods of inflation from the data, and even for products whose price had not increased. The findings hold for different aggregate and disaggregate measures of inflation and also after allowing for lagged price adjustments.
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We are grateful to the anonymous referee and the editor Robert King for constructive comments and suggestions. In addition, we thank the participants and especially the discussants, Stephen Cecchetti at the November 2004 NBER Monetary Economics Program meeting and Judith Chevalier at the January 2002 North American Meeting of the Econometric Society, for useful and constructive comments. We are grateful also to Gershon Alperovich, Ignazio Angeloni, Larry Ball, Bob Barsky, Susanto Basu, David Bell, Leif Danziger, Martin Eichenbaum, Ben Friedman, Xavier Gabaix, Vitor Gaspar, Wolter Hassink, Peter Karadi, Anil Kashyap, Miles Kimball, Ed Knotek, Jurek Konieczny, Saul Lach, John Leahy, Dongwon Lee, Andy Levin, Igal Milchtaich, Benoît Mojon, Georg Müller, Monika Piazzesi, Akshay Rao, Adam Reiff, Ricardo Reis, Christina Romer, David Romer, Stephanie Rosenkranz, Avichai Snir, Bent Sorensen, Yossi Spiegel, Dani Tsiddon, Alex Wolman, Yaron Yehezkel, Andy Young, Mark Zbaracki, and Tao Zha for comments and suggestions. In addition we would like to thank the participants at the June 2008 Second International Conference on Small Open Economies in Globalized World at Wilfrid Laurier University, June 2007 conference on “Phillips Curve and Natural Rate Hypothesis” in the Kiel Institute for the World Economy, the May 2006 Second Statistical Challenges in E-Commerce Research Symposium at the University of Minnesota, the January 2005 Tel-Aviv University Conference in Memory of Oved Yosha, the August 2005 World Congress of the Econometric Society at University College London, the November 2005 Workshop on Modeling Pricing Behavior in Macroeconomic Models at the Federal Reserve Bank of Richmond, the December 2005 Second International Meeting on Experimental and Behavioral Economics at the University of Valencia, the June 2004 T.C. Koopmans’ First International Conference on “The Economics of Pricing” at Utrecht University, the June 2002 Marketing Science Conference at the University of Alberta, and the June 2001 Midwest Marketing Conference at the University of Michigan, as well as the seminar participants at Bar-Ilan University, Ben-Gurion University, European Central Bank, Recanati School of Business Administration at Tel-Aviv University, and the University of Minnesota for comments, suggestions, and advice, and Chetan Agarwal, Manish Aggarwal, Ning Liu, Sandeep Mangaraj, and Rishi Modh for excellent research assistance. Daniel Levy gratefully acknowledges the financial support from the Adar Foundation of the Economics Department at Bar-Ilan University. All authors contributed equally. We rotate co-authorship. All errors are ours.
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- Asymmetric price adjustment
- Monetary policy
- Price rigidity
- Rational inattention