On the Importance of Sectoral and Regional Shocks for Price-Setting

56 Pages Posted: 17 May 2011

See all articles by Guenter W. Beck

Guenter W. Beck

Goethe University Frankfurt; Center for Financial Studies

Kirstin Hubrich

Board of Governors of the Federal Reserve System

Massimiliano Giuseppe Marcellino

European University Institute; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS); Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: May 2011

Abstract

We use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lapping data blocks. This allows us to separately estimate aggregate, sectoral, country-specific and regional components of price changes. We thereby provide an improved estimate of the sectoral factor in comparison with previous literature, which decomposes price changes into an aggregate and idiosyncratic component only, and interprets the latter as sectoral. We find that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. We further contribute to the literature on price setting by providing evidence that country- and region-specific factors play an important role in addition to the sector-specific factors. We conclude that sectoral price changes have a “geographical” dimension, that leads to new insights regarding the properties of sectoral price changes.

Keywords: Disaggregated prices, euro area regional and sectoral inflation, common factor models

JEL Classification: E31, C38, D4, F4

Suggested Citation

Beck, Guenter W. and Hubrich, Kirstin and Marcellino, Massimiliano, On the Importance of Sectoral and Regional Shocks for Price-Setting (May 2011). ECB Working Paper No. 1334. Available at SSRN: https://ssrn.com/abstract=1813977

Guenter W. Beck (Contact Author)

Goethe University Frankfurt ( email )

Mertonstrasse 17
Frankfurt, 60325
Germany
++49 69 798-28320 (Phone)
++49 69 798-28321 (Fax)

HOME PAGE: http://www.wiwi.uni-frankfurt.de/~gbeck

Center for Financial Studies ( email )

Taunusanlage 6
Frankfurt am Main, 60329
Germany
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++ 49 (69) 24294177 (Fax)

Kirstin Hubrich

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Massimiliano Marcellino

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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