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Variance Decomposition of Prices in an Emerging Economy

Author

Listed:
  • Fernando Borraz

    (Banco Central del Uruguay)

  • Joaquín Saldain

    (Banco Central del Uruguay)

Abstract

We use a one million good-level dataset of prices in Uruguay which comprises grocery stores in the capital city of Montevideo to decompose the variance of prices to identify the sources of such variability. We estimate the specific contribution of the product, chain and individual store to the variability of prices. Estimates are carried out with the data in different periods, with time trend inflation and excluding nonhomogeneous goods to estimate robust results. We use the three error model to decompose the price variation to find that chain specific shocks account for half of it. The importance of shocks to individual products and product categories common to all stores is the other half. Our results indicate that the importance of chains in price variation in Uruguay is halfway between that of US and Chile. Therefore, in an emerging economy the price strategies of retailers are not so much different than in the US to explain price variation than previously thought.

Suggested Citation

  • Fernando Borraz & Joaquín Saldain, 2015. "Variance Decomposition of Prices in an Emerging Economy," Documentos de trabajo 2015001, Banco Central del Uruguay.
    • Handle: RePEc:bku:doctra:2015001
    as

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    File URL: https://www.bcu.gub.uy/Estadisticas-e-Indicadores/Documentos%20de%20Trabajo/1.2015.pdf
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    References listed on IDEAS

    as
    1. Fernando Borraz & Alberto Cavallo & Roberto Rigobon & Leandro Zipitria, 2016. "Distance and Political Boundaries: Estimating Border Effects under Inequality Constraints," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(1), pages 3-35, January.
    2. Gastón Chaumont & Miguel Fuentes & Felipe Labbé & Alberto Naudon, 2011. "A Reassessment of Flexible Price Evidence Using Scanner Data: Evidence from an Emerging Economy," Working Papers Central Bank of Chile 641, Central Bank of Chile.
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    4. Klenow, Peter J. & Malin, Benjamin A., 2010. "Microeconomic Evidence on Price-Setting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284, Elsevier.
    5. Marianne Bertrand & Francis Kramarz, 2002. "Does Entry Regulation Hinder Job Creation? Evidence from the French Retail Industry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1369-1413.
    6. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    7. Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(4), pages 1415-1464.
    8. Timothy Dunne & J. Bradford Jensen & Mark J. Roberts, 2009. "Producer Dynamics: New Evidence from Micro Data," NBER Books, National Bureau of Economic Research, Inc, number dunn05-1, February.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    precios; descomposición de varianza; estrategias de firmas; Uruguay;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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