Bank of Lithuania
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No 105

New Facts on Consumer Price Rigidity in the Euro Area

  • Abstract

    Using CPI micro data for 11 euro area countries covering about 60% of the euro area consumption basket over the period 2010-2019, we document new findings on consumer price rigidity in the euro area: (i) each month on average 12.3% of prices change, which compares with 19.3% in the United States; when we exclude price changes due to sales, however, the proportion of prices adjusted each month is 8.5% in the euro area versus 10% in the United States; (ii) differences in price rigidity are rather limited across euro area countries but much larger across sectors; (iii) the median price increase (resp. decrease) is 9.6% (13%) when including sales and 6.7% (8.7%) when excluding sales; cross-country heterogeneity is more pronounced for the size than for the frequency of price changes; (iv) the distribution of price changes is highly dispersed: 14% of price changes in absolute values are lower than 2% whereas 10% are above 20%; (v) the overall frequency of price changes does not change much with inflation and does not react much to aggregate shocks; (vi) changes in inflation are mostly driven by movements in the overall size; when decomposing the overall size, changes in the share of price increases among all changes matter more than movements in the size of price increases or the size of price decreases. These findings are consistent with the predictions of a menu cost model in a low inflation environment where idiosyncratic shocks are a more relevant driver of price adjustment than aggregate shocks.

    Keywords: price rigidity, inflation, consumer prices, micro data.

    JEL codes: D40, E31.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 27

Producer and consumer price rigidity: the case of Lithuania

  • Abstract

    I provide the first statistics on producer and consumer price rigidity in Lithuania based on HICP and PPI item-level databases covering about 73% and 99.5% of their respective weights between 2010 and 2018. Producer prices are much more flexible than consumer prices, with an average monthly frequency of price change of 58% versus 18%. Contrariwise, the average size of price increases and decreases is higher in the HICP, reaching about 17-18% in absolute terms, whereas it is 7.5% in the PPI. In both price families, changes in item-level inflation are primarily due to variations in the size of price changes. However, the sources of these size changes are substantially shaped by shifts in the share of the number of price increases in the total.

    JEL Codes: D40, E31, E50.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 100

State-Contingent Forward Guidance

  • Abstract

    This paper proposes a new strategy for modeling and solving state-dependent forward guidance policies (SCFG). We study its transmission channels using a DSGE model with search and matching frictions in which agents account for the fact that the SCFG is an endogenous regime-switching system. A fully credible SCFG causes a boom in inflation and output but no rapid exit from the ZLB. Thus, the transmission of its effects is primarily through the realization of additional ZLB periods more than through changes in expectations. We next consider the implications of imperfect credibility. In this case of uncertainty, an SCFG is less impactful. Finally, using counterfactual experiments on the December 2012 FOMC statement, we find that it led to about 1.5 pp gain in unemployment and 0.5 pp in inflation.

    Keywords: New Keynesian model, Search and matching, ZLB, Forward guidance.

    JEL codes: E30, J60.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 93

The Effect of the Euro Changeover on Prices: Evidence from Lithuania

  • Abstract

    At the aggregate level, I find that the euro changeover did not lead to a significant change in the overall inflation rate between 2015 and 2019 in Lithuania. When the measures are diversified, however, some inflationary effects emerge in sub-categories. I therefore analyze this heterogeneity at the disaggregated level using a large sample of prices that constitutes the CPI from 2010 to 2018. I show that significant price changes have been confined to the low-weighted components of the HICP. This explains why a spike in the overall price level did not occur at the time of the changeover.

    Keywords: Euro changeover, synthetic difference-in-differences, regression discontinuity in time, price changes.

    JEL codes: E31, F33, L11.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 79

Euro Area Monetary Communications: Excess Sensitivity and Perception Shocks

  • Abstract

    We explore new dimensions of the ECB’s monetary communications using the Euro Area Monetary Policy Event-Study Database (EA-MPD) built by Altavilla et al. (2019). We find that three new factors are needed to capture an excess sensitivity of long-term sovereign yields around monetary announcements. "Duration" surprises cause variations in real long-term rates and are mainly transmitted by term premiums. The "Sovereign spread" and "Save the Euro" surprises greatly influence the long-term yields of the periphery countries. These effects are difficult to reconcile with classic monetary policy shocks. We therefore study their underlying nature and discover that they have the characteristics of "Information", or what we label "Perception" shocks.

    Keywords: Monetary surprises, Event-study, Excess sensitivity, Perception shocks, High-frequency Identification.

    JEL Codes: E43, E44, E52, E58, G12.