Price Dispersions in Monetary Unions: The Role of Fiscal Shocks

34 Pages Posted: 7 Mar 2003

See all articles by Fabio Canova

Fabio Canova

BI Norwegian Business School

Evi Pappa

London School of Economics & Political Science (LSE); Autonomous University of Barcelona - Department of Economics and Economic History

Date Written: February 2003

Abstract

We study the effect of regional expenditure and revenue shocks on price dispersion in a monetary union using annual US state and quarterly EU data. We identify fiscal shocks using sign restrictions on the dynamics of expenditures, revenues, deficits and output. We construct two estimates for structural price dispersion dynamics, one for the average and one for each unit, which optimally weight the information contained in the data for all units. We find that fiscal shocks explain between 10-20% of the variability of price dispersion in the US and between 3-4% in the EU. On average, the predictions of standard theory are confirmed: Expansionary fiscal disturbances produce positive price dispersion responses in both areas while distortionary balance budget shocks produce negative price responses. In about one third of the units, negative price dispersion responses to expansionary fiscal shocks are observed. Further, heterogeneities in shapes and peak responses are observed. Explanations for the puzzling features are provided.

Keywords: Fiscal policy, price dispersions, Bayesian techniques, supply effects

JEL Classification: E30, H30

Suggested Citation

Canova, Fabio and Pappa, Paraskevi (Evi), Price Dispersions in Monetary Unions: The Role of Fiscal Shocks (February 2003). Available at SSRN: https://ssrn.com/abstract=385903

Fabio Canova (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Paraskevi (Evi) Pappa

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7584 (Phone)
+44 20 7831 1840 (Fax)

Autonomous University of Barcelona - Department of Economics and Economic History ( email )

Edifici B - Campus Bellaterra
Barcelona, 08193
Spain

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