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Price Setting Behavior and Hazard Functions:

Evidence from Japanese CPI Micro Data

August 2007
Daisuke Ikeda*1
Shinichi Nishioka*2

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Abstract

We explore the micro price setting behavior using micro data of the consumer price index (CPI) in Japan. We estimate price hazard functions by the finite mixture model with multiple spells allowing the heterogeneity among price setters. Our estimation supports these striking findings. First, unlike much literature, our estimation finds increasing hazard functions and no decreasing hazard function. The estimated hazard functions are classified mainly into four groups: i) the flexible group; ii) the Calvo pricing group with low frequencies; iii) the Taylor pricing group with regular price changes; and iv) the increasing hazard group. Second, a decreasing empirical hazard function, observed in many countries as well as in Japan, is reproduced by estimated hazard functions of those four groups. Third, the increasing hazard group is likely to follow the time-dependent pricing rather than the state-dependent pricing in our sample period 2000-2004.

Keywords:
Hazard function, Heterogeneity, Finite mixture model, State-dependent pricing, Time-dependent pricing.

We thank participants in the Research Center for Price Dynamics conference "Inflation Dynamics in Japan, US, and EU" and seminar participants at Hitotsubashi University, and staff members of the Bank of Japan. Any remaining errors are the sole responsibility of our own. The views expressed herein are those of the authors and should not be interpreted as those of the Bank of Japan.

  • *1   Research and Statistics Department
  • *2   Research and Statistics Department
    e-mail: shinichi.nishioka@boj.or.jp

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