Using Brexit to Identify the Nature of Price Rigidities

Bart Hobijn, Fernanda Nechio and Adam Shapiro

No 2019-13, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Using price quote data that underpin the official U.K. consumer price index (CPI), we analyze the effects of the unexpected passing of the Brexit referendum to the dynamics of price adjustments. The sizable depreciation of the British pound that immediately followed Brexit works as a quasi-experiment, enabling us to study the transmission of a large common marginal cost shock to inflation as well as the distribution of prices within granular product categories. A large portion of the inflationary effect is attributable to the size of price adjustments, implying that a time-dependent price-setting model can match the response of aggregate inflation reasonably well. The state-dependent model fares better in capturing the endogenous selection of price changes at the lower end of the price distribution, however, it misses on the magnitude of the adjustment conditional on selection.

JEL-codes: D40 E31 F31 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2019-04-30
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Using Brexit to identify the nature of price rigidities (2021)
Chapter: Using Brexit To Identify the Nature of Price Rigidities (2020)
Working Paper: Using Brexit to Identify the Nature of Price Rigidities (2019)
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DOI: 10.24148/wp2019-13

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