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Variance Decomposition of Prices in an Emerging Economy

Fernando Borraz () and Joaquín Saldain ()

Monetaria, 2017, vol. V, issue 2, 243-269

Abstract: We use a one million good-level dataset of prices in Uruguay which comprises grocery stores in the capital city of Montevideo to decompose the variance of prices to identify the sources of such variability. We estimate the specific contribution of the product, chain, and individual store to the variability of prices. Estimates are carried out with the data in different periods, with time trend inflation and excluding nonhomogeneous goods to estimate robust results. We use the three-error model to decompose the price variation to find that chain specific shocks account for half of it. The importance of shocks to individual products and product categories common to all stores is the other half. Our results indicate that the importance of chains in price variation in Uruguay is halfway between that of the United States and Chile. Therefore, in an emerging economy, the price strategies of retailers are not so much different from those in the United States to compare to what previously thought.

Keywords: prices; variance decomposition; firm strategy; Uruguay. (search for similar items in EconPapers)
JEL-codes: E31 E52 L10 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Variance Decomposition of Prices in an Emerging Economy (2015) Downloads
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Handle: RePEc:cml:moneta:v:v:y:2017:i:2:p:243-269