Asymmetries in Price-Setting Behavior: New Microeconometric Evidence from Switzerland

Bo E. Honoré, Daniel Kaufmann and Sarah Marit Lein

Issue
2012-09

Pages
57

JEL classification
E31, E4, E5, C3, C23

Keywords
Asymmetric price setting, downward nominal price rigidity, front loading, menu-cost model, heterogeneity, CPI micro data, panel data

Year
2012

In this paper we follow the recent empirical literature that has specified reduced-form models for price setting that are closely tied to (S, s)-pricing rules. Our contribution to the literature is twofold. First, we propose an estimator that relaxes distributional assumptions on the unobserved heterogeneity. Second, we use the estimator to examine asymmetries in price-setting behavior. Using micro price data underlying the Swiss CPI we find that a substantial share of asymmetries in the frequency of price changes can be traced back to a rising aggregate price level. We show that asymmetries would be reduced substantially in the absence of aggregate inflation.