The Flexibility of Prices: Micro versus Macro Determinants


The Flexibility of Prices: Micro versus Macro Determinants

Research Seminar

Tuesday 30 October 2018, 16:30 — 17:30

Presented by  Huw Dixon, Cardiff Business School  

Venue: Office for National Statistics, 1 Drummond Gate, London, SW1V 2QQ

A popular measure of price-flexibility is the frequency of price changes: the proportion of prices that change in a given time period. The relationship between this measure and the flexibility of prices is not as clear as some think. The seminar will start with a look at the statistical theory underlying this statistic from the perspective of survival analysis.  However, are macro variables (such as inflation and output growth) important in determining this frequency? And, if so, are they as important as micro factors? For the UK CPI microdata, there is clear evidence that inflation is important in that higher inflation leads to more firms changing price (Dixon et al 2014, Petrella et al 2018). In this paper, we use firm level German survey data to explore the balance between micro and macro determinants of price flexibility. The data set is monthly, covering manufacturing firms over the period 1980-2015 and provides qualitative information about individual firms, including whether the price of their main product has changed or not. If we ignore the micro data, we find that aggregate PPI inflation and industrial output are significant determinates of the frequency of price change. However, when we include the firm level data we find that the importance of inflation and output is reduced and that the most important factors are microeconomic.

Huw Dixon finished his PhD at Oxford University in 1985 and after posts at Birkbeck and Essex, he became a Professor at York in 1992 and then at Cardiff in 2006. He has been an editor of the Economic Journal and on the editorial board of the Review of Economic Studies. His research interests include oligopoly theory, bounded rationality, the imperfectly competitive foundations of macroeconomics and the measurement of nominal rigidity using price and wage micro data.

Huw Dixon