What Lies Beneath: What Can Disaggregated Data Tell Us about the Behaviour of Prices?
32 Pages Posted: 21 Mar 2009 Last revised: 24 Dec 2009
Date Written: March 20, 2009
This paper uses a factor-augmented vector autoregression technique to examine the role that macroeconomic and sector-specific factors play in UK price fluctuations at the aggregate and disaggregated levels. Macroeconomic factors are less important for disaggregated prices than aggregate ones. There also appears to be significant aggregation bias - the persistence of aggregate inflation series is much higher than the underlying persistence across the range of disaggregated price series. Our results suggest that monetary policy affects relative prices in the short to medium term, and that the degree of competition within industries plays a role in determining pricing behaviour.
Keywords: Inflation persistence, disaggregation, principal components
JEL Classification: C3, D4, E31, E52
Suggested Citation: Suggested Citation