Sergio Santoro
- 24 April 2024
- ECONOMIC BULLETIN - ARTICLEEconomic Bulletin Issue 3, 2024Details
- Abstract
- The pricing decisions of firms are a key determinant of inflation. To understand inflation dynamics, it is necessary to analyse how often and by how much individual prices change. This article discusses what micro price data gathered by the European System of Central Banks’ Price-setting Microdata Analysis Network (PRISMA) tell us about the way firms set their prices. The results point to state dependence in pricing, whereby firms change prices more frequently following large shocks. This also affects the transmission of monetary policy. Evidence from recent microdata as at the end of 2023 suggests that, after an increase in the frequency of price changes following the unusually large shocks experienced since 2020, price changes in the euro area are starting to behave in a more similar way to the pre-pandemic period.
- JEL Code
- 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
- 15 March 2024
- OCCASIONAL PAPER SERIES - No. 344Details
- Abstract
- This paper takes stock of the ECB’s macroeconometric modelling strategy by focusing on the models and applications used in the Forecasting and Policy Modelling Division. We focus on the guiding principles underpinning the current portfolio of the main macroeconomic models and illustrate how they can in principle be used for economic forecasting, scenario and risk analyses. We also discuss the modelling agenda which is currently under development, focusing notably on heterogeneity, machine learning, expectation formation and climate change. The paper makes it clear that the large macroeconometric models typically developed in central banks remain stylised descriptions of our modern economies and can fail to predict or assess the nature of economic events (especially when big crises arise). But even in highly uncertain economic conditions, they can still provide a meaningful contribution to policy preparation. We conclude the paper with a roadmap which will allow the ECB and the Eurosystem to exploit technological advances and cooperation across institutions as a useful means of ensuring that the modelling framework is not only resilient to disruptive events but also innovative.
- JEL Code
- C30 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→General
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
- 17 July 2023
- OCCASIONAL PAPER SERIES - No. 322Details
- Abstract
- This paper discusses the normative implications of the micro evidence on heterogeneity in price setting gathered by the Price-setting Microdata Analysis Network (PRISMA) for the level of inflation that central banks should target. The micro price data underlying the consumer price index are used to estimate relative price trends over the product life cycle. Minimising the welfare consequences of relative price distortions in the presence of these trends requires targeting a significantly positive inflation rate in France, Germany and Italy: the steady-state inflation rate, jointly maximising welfare in all three countries, ranges from 1.1% to 1.7%. Other considerations not taken into account in the present paper may push up optimal inflation targets further. The welfare costs of targeting an inflation rate of zero, as suggested by monetary models ignoring relative price trends, or of targeting 4%, turn out to be substantial.
- JEL Code
- 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
- 17 July 2023
- OCCASIONAL PAPER SERIES - No. 321Details
- Abstract
- This paper analyses the implications of the evidence on micro price setting gathered by Price-setting Microdata Analysis Network (PRISMA) for inflation dynamics and monetary policy, relying on calibrated models and direct empirical evidence. According to models calibrated to the euro area micro evidence in Gautier et al. (2022, 2023), infrequent price changes and moderate state dependence in price setting should result in a meaningful Phillips curve in the euro area. Empirical estimates of the Phillips curve during the low-inflation period confirm previous findings of a relatively flat but stable slope. This estimated flat slope reflects both infrequent and subdued price adjustment in response to aggregate shocks, i.e. the presence of nominal and real rigidities. Model-based simulations show that, due to non-linearities in price setting, changes in trend inflation above 5-6% would have significant effects on the euro area Phillips curve. Similarly, shocks to nominal costs larger than 15% would result in non-linear effects on inflation dynamics in calibrated models. In line with these simulations, recent micro evidence suggests that the return of higher and more volatile inflation seems to be associated with higher frequencies of price changes, mainly because the frequency of price increases rises with the level and volatility of inflation.
- JEL Code
- E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
- 17 July 2023
- OCCASIONAL PAPER SERIES - No. 319Details
- Abstract
- This paper documents five stylised facts relating to price adjustment in the euro area, using various micro price datasets collected in a period with relatively low and stable inflation. First, price changes are infrequent in the core sectors. On average, 12% of consumer prices change each month, falling to 8.5% when sales prices are excluded. The frequency of producer price adjustment is greater (25%), reflecting that the prices of intermediate goods and energy are more flexible. For both consumer and producer prices, cross-sectoral heterogeneity is more pronounced than cross-country heterogeneity. Second, price changes tend to be large and heterogeneous. For consumer prices, the typical absolute price change is about 10%, and the distribution of price changes shows a broad dispersion. For producer prices, the typical absolute price change is smaller, but nevertheless larger than inflation. Third, price setting is mildly state-dependent: the probability of price adjustment rises with the size of price misalignment, mainly reflecting idiosyncratic shocks, but it does not increase very sharply. Fourth, for both consumer and producer prices, the repricing rate showed no trend in the period 2005-19 but was more volatile in the short run. Fifth, small cyclical variations in frequency did not contribute much to fluctuations in aggregate inflation, which instead mainly reflected shifts in the average size of price changes. Consistent with idiosyncratic shocks as the main driver of price changes, aggregate disturbances affected inflation by shifting the relative number of firms increasing or decreasing their prices, rather than the size of price increases and decreases.
- JEL Code
- E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
E5 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit
- 21 December 2022
- WORKING PAPER SERIES - No. 2761Details
- Abstract
- We show that a sticky price model featuring firms' heterogeneity in terms of productivity and strategic complementarities in price setting delivers a strictly positive optimal inflation in steady state, differently from standard New Keynesian models. Due to strategic complementarities, more productive firms have higher markups in steady state. This leads to a misallocation distortion, as more productive firms produce too little compared to the social optimum. An increase of steady state inflation curbs the markups, especially those of the more productive firms, hence attenuating the inefficient dispersion of markups. At low levels of inflation, the gains from the reduction in misallocation outweigh the cost of inflation. Heterogeneity in productivity and strategic complementarities in price setting, the key ingredients of our model, imply that also firms' response to shocks is heterogenous: less productive firms transmit cost shocks to prices much more than more productive ones. To provide empirical support to our key mechanism we resort to a quasi-natural experiment occurred in Italy in late 2014, when a cut to social security contributions for all new open-ended contracts was announced. Consistently with our theory, we show that the pass-through of this shock to labour costs was much stronger for less productive firms.
- JEL Code
- D00 : Microeconomics→General→General
D22 : Microeconomics→Production and Organizations→Firm Behavior: Empirical Analysis
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
- 17 June 2022
- WORKING PAPER SERIES - No. 2669Details
- Abstract
- Using CPI micro data for 11 euro area countries covering about 60% of the euro area consumption basket over the period 2010-2019, we document new findings on consumer price rigidity in the euro area: (i) each month on average 12.3% of prices change, which compares with 19.3% in the United States; when we exclude price changes due to sales, however, the proportion of prices adjusted each month is 8.5% in the euro area versus 10% in the United States; (ii) differences in price rigidity are rather limited across euro area countries but much larger across sectors; (iii) the median price increase (resp. decrease) is 9.6% (13%) when including sales and 6.7% (8.7%) when excluding sales; cross-country heterogeneity is more pronounced for the size than for the frequency of price changes; (iv) the distribution of price changes is highly dispersed: 14% of price changes in absolute values are lower than 2% whereas 10% are above 20%; (v) the overall frequency of price changes does not change much with inflation and does not react much to aggregate shocks; (vi) changes in inflation are mostly driven by movements in the overall size; when decomposing the overall size, changes in the share of price increases among all changes matter more than movements in the size of price increases or the size of price decreases. These findings are consistent with the predictions of a menu cost model in a low inflation environment where idiosyncratic shocks are a more relevant driver of price adjustment than aggregate shocks.
- JEL Code
- D40 : Microeconomics→Market Structure and Pricing→General
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation - Network
- Price-setting Microdata Analysis Network (PRISMA)
- 21 September 2021
- OCCASIONAL PAPER SERIES - No. 269Details
- Abstract
- The ECB’s price stability mandate has been defined by the Treaty. But the Treaty has not spelled out what price stability precisely means. To make the mandate operational, the Governing Council has provided a quantitative definition in 1998 and a clarification in 2003. The landscape has changed notably compared to the time the strategy review was originally designed. At the time, the main concern of the Governing Council was to anchor inflation at low levels in face of the inflationary history of the previous decades. Over the last decade economic conditions have changed dramatically: the persistent low-inflation environment has created the concrete risk of de-anchoring of longer-term inflation expectations. Addressing low inflation is different from addressing high inflation. The ability of the ECB (and central banks globally) to provide the necessary accommodation to maintain price stability has been tested by the lower bound on nominal interest rates in the context of the secular decline in the equilibrium real interest rate. Against this backdrop, this report analyses: the ECB’s performance as measured against its formulation of price stability; whether it is possible to identify a preferred level of steady-state inflation on the basis of optimality considerations; advantages and disadvantages of formulating the objective in terms of a focal point or a range, or having both; whether the medium-term orientation of the ECB’s policy can serve as a mechanism to cater for other considerations; how to strengthen, in the presence of the lower bound, the ECB’s leverage on private-sector expectations for inflation and the ECB’s future policy actions so that expectations can act as ‘automatic stabilisers’ and work alongside the central bank.
- JEL Code
- 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
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
- 27 July 2021
- WORKING PAPER SERIES - No. 2575Details
- Abstract
- Using micro price data underlying the Harmonized Index of Consumer Prices in France, Germany and Italy, we estimate relative price trends over the product life cycle and show that minimizing price and mark-up distortions in the presence of these trends requires targeting a significantly positive inflation target. Relative price trends shift the optimal inflation target up from a level of zero percent, as suggested by the standard sticky price literature, to a range of 1.1%- 2.1% in France, 1.2%-2.0% in Germany, 0.8%-1.0% in Italy, and 1.1-1.7% in the Euro Area (three country average). Differences across countries emerge due to systematic differences in the strength of relative price trends. Other considerations not taken into account in the present paper may push up the optimal inflation targets further. The welfare costs associated with targeting zero inflation turn out to be substantial and range between 2.1% and 4.5% of consumption in present-value terms.
- JEL Code
- 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 - Network
- Price-setting Microdata Analysis Network (PRISMA)