Price Setting Behaviour in Latvia: Descriptive Evidence from CPI Microdata

Discussion Paper 1/2010

Abstract
The question of price stickiness remains one of the most important in macroeconomics, as price flexibility partly determines how long it takes for inflation and real economic variables to return to their potential levels after a shock. To get a better understanding of price change frequency and size, the empirical work on price stickiness based on microdata from surveys on prices of individual products from individual outlets is needed. The main goal of this study is to provide descriptive evidence on the degree of nominal rigidity of consumer prices in Latvia at aggregate and disaggregate levels. To achieve this goal, we use the micro database on consumer prices provided by the CSB. The main finding of the paper is that during 2003-2009 Latvia's consumer prices were flexible. The average duration of a price spell was 3.5 months, and every month on average 28.7% of consumer prices were changed.

Keywords: price setting behaviour, Latvia's consumer prices, frequency of price change, duration, size of price change, sales, time-dependent pricing, state-dependent pricing

JEL classification codes: D40, E31