Do decreasing hazard functions for price changes make any sense?

Luis Alvarez, Pablo Burriel () and Ignacio Hernando

No 508, Working Papers from Banco de España

Abstract: A common finding in empirical studies using micro data on consumer and producer prices is that hazard functions for price changes are decreasing. This means that a firm will have a lower probability of changing its price the longer it has kept it unchanged. This result is at odds with standard models of price setting. In this note a simple explanation is proposed: decreasing hazards may result from aggregating heterogeneous price setters. We show analytically the form of this heterogeneity effect for the most commonly used pricing rules and find that the aggregate hazard is (nearly always) decreasing. Results are illustrated using Spanish producer and consumer price data. We find that a very accurate representation of individual data is obtained by considering just 4 groups of agents: one group of flexible Calvo agents, one group of intermediate Calvo agents and one group of sticky Calvo agents plus an annual Calvo process.

Keywords: hazard function; price setting models; heterogeneous agents; mixture models (search for similar items in EconPapers)
JEL-codes: C40 D40 E30 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2005-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (53)

Downloads: (external link)
http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/05/Fic/dt0508e.pdf First version, April 2005 (application/pdf)

Related works:
Working Paper: Do decreasing hazard functions for price changes make any sense? (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0508

Access Statistics for this paper

More papers in Working Papers from Banco de España Contact information at EDIRC.
Bibliographic data for series maintained by Ángel Rodríguez. Electronic Dissemination of Information Unit. Research Department. Banco de España ().