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Exchange rates, uncertainty, and price-setting: Evidence from CPI microdata

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  • Canales, Mario
  • Lopez-Martin, Bernabe

Abstract

We analyze the role of exchange rates and uncertainty for inflation and price-setting behavior. To this end, we exploit micro-level data underlying the Consumer Price Index of Chile for the period 2010–2018, and employ a standard dynamic distributed lags specification. We find that uncertainty and exchange rates are positively associated with product-level inflation. Then, we analyze the effect on different dimensions of price-setting. The relation with the frequency of positive (negative) price changes at the variety-establishment level is positive (negative). The results for frequencies are quantitatively important, highlighting this adjustment margin against movements in exchange rates and uncertainty. In contrast, we find little association with the magnitudes of price adjustments.

Suggested Citation

  • Canales, Mario & Lopez-Martin, Bernabe, 2024. "Exchange rates, uncertainty, and price-setting: Evidence from CPI microdata," Economic Modelling, Elsevier, vol. 139(C).
    • Handle: RePEc:eee:ecmode:v:139:y:2024:i:c:s0264999324001184
    DOI: 10.1016/j.econmod.2024.106762
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    Keywords

    Exchange rates; Uncertainty; Inflation; Price-setting;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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