Price Variability Under Price Level Stability—A Study of Sierra Leone's Price Dynamics Using Micro-Level Price Data

Arto Kovanen

IMF Staff Papers, 2007, vol. 54, issue 4, pages 701-726

Abstract: This paper offers a unique insight into price dynamics and pricing behavior in Sierra Leone. It examines micro-level price data during a period when the price level remained constant while relative prices displayed considerable volatility. We find that the key factors to explain differences in the average frequency of price changes are inflation volatility and product diversification. Inflation inertia is not significant empirically, except during an earlier period. We show that the variability of relative prices is largely due to a few items that are weighted heavily in the consumer price index. The empirical evidence further suggests that producers in Sierra Leone are more likely to adjust their prices in response to events rather than at fixed intervals. Inflation volatility has also weakened monetary policy effectiveness in Sierra Leone, which could be remedied by introducing a core inflation measure that would exclude volatile product prices. IMF Staff Papers (2007) 54, 701–726. doi:10.1057/palgrave.imfsp.9450021

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