Global versus local shocks in micro price dynamics
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2011Google Scholar check
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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 ináation. 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 ñin particular, prices respond faster to local
macro shocks than to global micro ones ñimplying 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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