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Price Variability and Price Dispersion in a Stable Monetary Environment: Evidence from Germany

Matthias Fengler & Joachim K. Winter

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abstract We investigate the relationship between inflation and price variation using highly disaggregated, weekly price data for consumption goods recorded in Germany during 1995, a low-inflation period. We find a significant positive correlation between the rates of price change and price dispersion, both at the level of individual products and product groups. However, we find no correlation between the rates of price change and price variability. Together with results from similar studies, Tommasi (1993. Optimal Pricing, Inflation, and the Cost of Price Adjustment. MIT Press: London, Cambridge, MA; 485–511) and Parsley (1996. J. Money Credit Banking28: 323–341), a remarkable pattern emerges: when aggregate nominal shocks are small, only price dispersion is correlated with price changes. As the rate of inflation rises, both variability and dispersion become affected. During hyper-inflation, systematic movements of price dispersion seem to disappear. We conclude that price dispersion is best explained by micro-economic frictions in price adjustment, whereas price variability appears to be related to costly price search and information problems.
   
type journal paper
   
keywords price stickiness, retail markets
   
language English
kind of paper journal article
date of appearance 27-7-2007
journal Managerial and Economic Decisions
publisher John Wiley & Sons, Ltd.
ISSN 1099-1468
DOI 10.1002/mde.1373
volume of journal 28
number of issue 7
page(s) 789-801
review double-blind review
   
citation Fengler, M., & Winter, J. K. (2007). Price Variability and Price Dispersion in a Stable Monetary Environment: Evidence from Germany. Managerial and Economic Decisions, 28(7), 789-801, DOI:10.1002/mde.1373.