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Abstract
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Descriptive Statistics
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Economics
Econometrics

Global Versus Local Shocks in Micro Price Dynamics

Profile image of Marios ZachariadisMarios Zachariadis

2012, SSRN Electronic Journal

https://doi.org/10.2139/SSRN.2008678
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43 pages

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Abstract

A number of recent papers point to the importance of distinguishing between the price reaction to micro and macro shocks in order to reconcile the volatility of individual prices with the observed persistence of aggregate in ‡ation. We emphasize instead the importance of distinguishing between global and local shocks. We exploit a panel of 276 micro price levels collected on a semi-annual frequency from 1990 to 2010 across 88 cities in 59 countries around the world, that enables us to distinguish between di¤ erent types (local and global) of micro and macro shocks. The persistence associated with each of these components and its relation with volatility of the di¤erent components, provides a number of new facts. Prices respond more slowly to global shocks as compared to local ones -in particular, prices respond faster to local macro shocks than to global micro ones -implying that the relatively slow response of prices to macro shocks documented in recent studies comes from global rather than local sources. In addition, more volatility in local conditions leads to more persistent relative price distortions due to slower response of prices to global shocks, with this local -global link more than twice as large as the corresponding micro-macro link. Finally, global shocks account for half of the volatility in prices. Overall, our results imply that global shocks are important when analyzing price dynamics or assessing price-setting models.

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