Does a Higher Frequency of Micro-level Price Changes Matter for Macro Price Stickiness?: Assessing the Impact of Temporary Price Changes

Yoshiyuki Kurachi, Kazuhiro Hiraki and Shinichi Nishioka
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Kazuhiro Hiraki: Bank of Japan
Shinichi Nishioka: Bank of Japan

No 16-E-9, Bank of Japan Working Paper Series from Bank of Japan

Abstract: Even though prices at the macro level in Japan, like in Europe and the United States, are sticky, individual prices as measured in micro data change frequently. The reason for this puzzle, it has been argued in the context of the United States, is the presence of temporary price changes due to sales and other promotions. In other words, the impact of temporary price changes on the inflation rate is negligible, since some price cuts during sales are cancelled out by other price rebounds from the previous sale prices. The hypothesis thus is that what affects macro-level inflation is not temporary price changes but changes in regular prices, which change only infrequently and hence are responsible for sticky prices at the macro level. We investigate this hypothesis using the micro data underlying Japan's consumer price index (CPI) and find that, in general, that the hypothesis is supported in Japan's case. Unlike in the United States, however, the frequency of temporary price changes has trended upward since the 1990s, so that the impact of temporary price changes on the inflation rate has gradually increased. If this development were to continue, it could lead to greater elasticity of the inflation rate in the future.

Date: 2016-07-12
New Economics Papers: this item is included in nep-mac and nep-mon
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