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Price Setting Behaviour in Latvia: Econometric Evidence from CPI Microdata

Konstantins Benkovskis (), Ludmila Fadejeva and Krista Kalnberzina

No 2011/01, Working Papers from Latvijas Banka

Abstract: This paper discovers the driving forces behind firms' decisions to adjust prices by using various panel logit models, which explain the probability of observing price change by a broad set of exogenous variables. The results of the models show that the consumer price formation in Latvia is a combination of both state-dependent and time-dependent behaviour. On the one hand, frequency of price changes depends on inflation, demand conditions, and the size of last price changes. On the other hand, we observe some elements of time-dependent price setting, e.g. price truncation and strong seasonal pattern. We also find several important differences in the price setting behaviour for cases of price increases and decreases. The fact that frequency of price changes in Latvia depends on inflation as well as demand and supply conditions could be seen as a prerequisite for faster price adjustment process in the event of distortions in the economy. In the case of economic imbalances, statedependent price formation changes flexibility of prices and ensures a faster adjustment process towards equilibrium.

Keywords: price setting behaviour; Latvia's consumer prices; frequency of price change; sales; time-dependent pricing; state-dependent pricing; panel logit model (search for similar items in EconPapers)
JEL-codes: C23 D40 E31 (search for similar items in EconPapers)
Date: 2011-01-28
New Economics Papers: this item is included in nep-cba and nep-com
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Related works:
Journal Article: Price setting behaviour in Latvia: Econometric evidence from CPI micro data (2012) Downloads
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