Inflation persistence and price-setting in the euro area : results of the Eurosystem Inflation Persistence Network

This article presents a summary of the main results produced by the Inflation Persistence Network (IPN), a network of researchers from the twelve national central banks of the euro area, the ECB and the universities, which aimed to conduct a joint analysis of Inflation persistence and pricing mechanisms. This network carried out both macroeconomic and microeconomic surveys. As regards Inflation persistence, one of the research findings indicated that the degree of Inflation persistence in the euro area was relatively moderate under the current monetary policy regime, but that these estimates were not very accurate. As regards the pricing strategies of firms, the IPN demonstrated among other things that firms in the euro area changed their prices less often than American firms, but that this greater rigidity was not due to any excess nominal downward price rigidity. The findings should permit the development of theoretical models based on microeconomic foundations compatible with the observed behaviour, and provide a better understanding of Inflation and the impact of monetary policy.Inflation persistence, price rigidity, monetary policy

Behaviour of Belgian firms in the context of globalisation : lessons from the conference on “International Trade : Threats and Opportunities in a Globalised World”

The article summarises the main lessons of the Bank’s 2010 conference which focused on international trade and foreign direct investment. The research is based on a microeconomic approach to the behaviour of Belgian firms, with reference to developments in the scientific literature on the subject. Firms active internationally have specific characteristics : they are larger and more productive than firms concentrating on the home market. The costs of entering international markets determine their globalisation strategies, be it in terms of timing, the number of markets canvassed, or the choice between exporting and foreign direct investment. Information technologies have a key role in the development of trade in services, especially for analytical work. It is also shown that, in the face of increased competition from Asian products, firms are tending to concentrate their exports on their leading products and to upgrade quality. The international activities of some firms also have positive repercussions on the productivity and globalisation decisions of firms active solely on the home market. Finally, the impact of globalisation on employment is analysed from various angles. In general, trade with low-wage countries tends to increase demand for skilled labour in Belgium and to reduce demand for unskilled labour. The effects of offshoring are comparable. Finally, while multinationals manage their workforce more flexibly than domestic firms, they have nevertheless been the source of substantial job creation, particularly where the subsidiaries of foreign multinationals are concerned.international trade, foreign direct investment, microeconomic analysis, firm heterogeneity, internationalisation, spillovers, multi-product firms, multinational firms, offshoring, employment, skills

Regulation and competition in the distribution sector in Belgium

While being a key sector in all developed economies, retail trade does actually appear to be one of the reasons for Europe’s lagging behind in potential output growth. One of the reasons for this lag could be regulation. By determining conditions for market access and for carrying out a commercial activity, the regulatory framework may exert some influence on both economic performance and market structure and, ultimately, on the degree of competition. The article assesses the retail trade situation in Belgium along these lines. As far as possible, Belgium’s performance is compared with that of neighbouring countries and the findings are assessed by cross-matching the various sources of information available. First, evidence from international indicators (such as those regularly published by the OECD), as well as from a review of the main legislation governing retail trade in Belgium, tend to suggest that regulation in Belgium is relatively abundant and restrictive for this sector. Operating conditions in particular appear to be more regulated than in neighbouring countries. As regards the retail trade sector’s economic performance, it should be noted that, like most other economic sectors, the retailing business in Belgium still has a higher productivity rate than in the majority of other European countries and even the United States too. However, unlike trends noted in other branches of activity, this favourable position has been gradually eroded over the last ten years. It does actually seem that Belgium’s main problem lies in its inability to improve the efficiency of the production factors being used. However, looking more closely at the food retailing sub-sector, no striking anomalies are noted in the market structure and the degree of competition in Belgium. Even though the overall indicators point to some concentration at national level, local competition – assessed with an original approach applied to detailed data – appears to be quite strong; only a few sales outlets have a dominant position. Moreover, the non-specialised food retail sector has a growing number of big shops, as well as an increasing number of hard discounters and a larger share of generic brand products in traditional retail outlets. Using detailed consumption price data from CityData and Eurostat, this analysis throws up evidence that prices charged by the retail sector are higher in Belgium than in the three neighbouring countries and the euro area as a whole. There have also been signs of a recent deterioration in the differential between prices in Belgian supermarkets and prices charged by German and Dutch supermarkets in particular. Adverse developments in labour costs in Belgium and higher retail business margins can go some way to explaining the trend in price differentials compared to Germany, where hard discounters are more common. Then again, the sharp deterioration in the price differentials between Belgium and the Netherlands recorded in supermarkets can largely be explained by the price war that raged between the major Dutch retail groups from October 2003 to December 2006. Overall, it therefore appears that the actual influence of specific regulatory requirements for the retail trade on the efficiency of the sector, on the degree of competition and, ultimately, on consumer prices needs to be looked at very carefully. On the one hand, simplifying regulations in force in Belgium would no doubt break down the barriers to entry without necessarily impeding other policy objectives. On the other hand, the performance of the retail distribution sector must be examined taking account of the specific features of the economy, such as population density and cultural preferences.retail, regulation, market structure, pricing, productivity

Price Setting in the Euro Area: Some Stylized Facts from Individual Consumer Price Data.

This paper documents patterns of price setting at the retail level in the euro area. A set of stylized facts on the frequency and size of price changes is presented along with an econometric investigation of their main determinants. Price adjustment in the euro area can be summarized in six stylized facts. First, prices of most products change rarely. The average monthly frequency of price adjustment is 15 p.c., compared to about 25 p.c. in the US. Second, the frequency of price changes is characterized by substantial cross-product heterogeneity and pronounced sectoral patterns: prices of (oil-related) energy and unprocessed food products change very often, while price adjustments are less frequent for processed food products, non-energy industrial goods and services. Third, cross-country heterogeneity exists but is less pronounced. Fourth, price decreases are not uncommon. Fifth, price increases and decreases are sizeable compared to aggregate and sectoral inflation rates. Sixth, price changes are not highly synchronized across price-setters. Moreover, the frequency of price changes in the euro area is related to a number of factors, in particular seasonality, outlet type, indirect taxation, use of attractive prices as well as aggregate or product-specific inflation.Price-setting ; consumer price ; frequency of price change.

Sticky Prices in the Euro Area: A Summary of New Micro Evidence,

This paper presents original evidence on price setting in the euro area at the individual level. We use micro data on consumer (CPI) and producer (PPI) prices, as well as survey information. Our main findings are: (i) prices in the euro area are sticky and more so than in the US; (ii) there is evidence of heterogeneity and of asymmetries in price setting behaviour; (iii) downward price rigidity is only slightly more marked than upward price rigidity and (iv) implicit or explicit contracts and coordination failure theories are important, whereas menu or information costs are judged much less relevant by firms.Price setting ; Price stickiness ; Consumer prices ; Producer prices ; Survey data.

Why are Prices Sticky? Evidence from Business Survey Data

This paper offers new insights on the price setting behaviour of German retail firms using a novel dataset that consists of a large panel of monthly business surveys from 1991-2006. The firm-level data allows matching changes in firms' prices to several other firm-characteristics. Moreover, information on price expectations allow analyzing the determinants of price updating. Using univariate and bivariate ordered probit specifications, empirical menu cost models are estimated relating the probability of price adjustment and price updating, respectively, to both time- and state- dependent variables. First, results suggest an important role for state-dependence; changes in the macroeconomic and institutional environment as well as firm-specific factors are significantly related to the timing of price adjustment. These findings imply that price setting models should endogenize the timing of price adjustment in order to generate realistic predictions concerning the transmission of monetary policy. Second, an analysis of price expectations yields similar results providing evidence in favour of state-dependent sticky plan models. Third, intermediate input cost changes are among the most important determinants of price adjustment suggesting that pricing models should explicitly incorporate price setting at different production stages. However, the results show that adjustment to input cost changes takes time indicating "additional stickiness" at the last stage of processing