The Distribution of the Size of Price Changes

Alberto  Cavallo; Roberto  Rigobon

Working Paper

The Distribution of the Size of Price Changes

by Alberto Cavallo and Roberto Rigobon

Abstract

Diﬀerent theories of price stickiness have distinct implications on the number of modes in the distribution of price changes. We formally test for the number of modes in the price change distribution of 36 supermarkets, spanning 22 countries and 5 continents. We present results for three modality tests: the two best-known tests in the statistical literature, Hartigan’s Dip and Silverman’s Bandwidth, and a test designed in this paper, called the Proportional Mass test (PM). Three main results are uncovered. First, when the traditional tests are used, unimodality is rejected in about 90 percent of the retailers. When we used the PM test, which reduces the impact of smaller modes in the distribution and can be applied to test for modality around zero percent, we still reject unimodality in two thirds of the supermarkets. Second, category-level heterogeneity can account for about half of the PM test’s rejections of unimodality. Finally, a simulation of the model in Alvarez, Lippi, and Paciello (2010) shows that the data is consistent a combination of both time and state-dependent pricing behaviors.

Keywords: Online Prices; Macroeconomics; Price; Change;

Language: English

Format: Print

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Citation:

Cavallo, Alberto, and Roberto Rigobon. "The Distribution of the Size of Price Changes." NBER Working Paper Series, No. 16760, September 2012.

In early 2020, a coronavirus pandemic swept the globe, ushering in unprecedented disruptions to the global economy. Both supply and demand were decimated by lockdowns and border closings, as well as reduced spending by fearful consumers. In response, governments around the world made equally unprecedented policy moves, spending trillions of dollars on fiscal stimulus measures to bridge the gap during the self-imposed shutdown. As the pandemic progressed, governments had to weigh the costs between loss of life due to opening up their economies and the economic devastation caused by delaying a reopening.

The HBS COVID-19 Global Policy Tracker is an initiative by the Business, Government and the International Economy (BGIE) unit at Harvard Business School (HBS) to collect and standardize economic policies implemented as a response to the coronavirus pandemic around the world. We focus on fiscal policy, monetary policy, and lockdowns and quantify government responses in common variables, units, and currencies to facilitate cross-country comparisons. The database is updated in real time with the efforts of several dozens of students at HBS and other Harvard schools.

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The Distribution of the Size of Price Changes

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