Do Decreasing Hazard Functions for Price Changes Make Any Sense?

42 Pages Posted: 20 May 2005

Date Written: March 2005

Abstract

A common finding in empirical studies using micro data on consumer and producer prices is that hazard functions for price changes are decreasing. This means that a firm will have a lower probability of changing its price the longer it has kept it unchanged. This result is at odds with standard models of price setting. Here a simple explanation is proposed: decreasing hazards may result from aggregating heterogeneous price setters. We show analytically the form of this heterogeneity effect for the most commonly used pricing rules and find that the aggregate hazard is (nearly always) decreasing. Results are illustrated using Spanish producer and consumer price data. We find that a very accurate representation of individual data is obtained by considering just 4 groups of agents: one group of flexible Calvo agents, one group of intermediate Calvo agents and one group of sticky Calvo agents plus an annual Calvo process.

Keywords: hazard function, price setting models, heterogeneous agents, mixture models

JEL Classification: C40, D40, E30

Suggested Citation

Álvarez, Luis J. and Burriel, Pablo and Hernando, Ignacio, Do Decreasing Hazard Functions for Price Changes Make Any Sense? (March 2005). ECB Working Paper No. 461. Available at SSRN: https://ssrn.com/abstract=683151

Luis J. Álvarez (Contact Author)

Banco de España ( email )

Madrid 28014
Spain

Pablo Burriel

Banco de España ( email )

Madrid 28014
Spain

Ignacio Hernando

Banco de España ( email )

Madrid 28014
Spain
+34 91 338 5186 (Phone)
+34 91 338 5678 (Fax)

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