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Uncertainty, Risk, and Price-Setting: Evidence from CPI Microdata

Mario Canales and Bernabe Lopez-Martin

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: We analyze the role of uncertainty and risk for price setting behavior and inflation. To this end, we exploit the micro-level data underlying the Consumer Price Index of Chile for the period 2010-2018. We consider in our analysis a set of established measures in the literature, among others: the economic policy uncertainty index (EPU) for Chile, the VIX for emerging economies, two indices of real and financial uncertainty constructed by Jurado, Ludvigson and Ng (AER, 2015), and the volatilities of the nominal exchange rate and the domestic stock market index. We find that uncertainty and risk are positively associated with product-level inflation, and with the frequency of positive price changes at the variety-establishment level, as well as a negative association with the frequency of negative price changes. The results are quantitatively important, the values of coefficients can be larger than of those typically estimated for the exchange rate pass-through in the literature and in our own estimations (for fluctuations equivalent to one standard deviation in the explanatory variables). In contrast, we find little association with the magnitudes of price adjustments.

Date: 2021-03
New Economics Papers: this item is included in nep-mac and nep-mon
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