Consumer price behaviour in Luxembourg: evidence from micro CPI data

This paper uses micro-level price data and analyses the behaviour of consumer prices in Luxembourg. We find that the median duration of consumer prices is roughly 8 months. The median durations of energy and unprocessed food are about 1.5 and 5 months, while prices of services typically change fewer than once a year. For some product types, such as non-energy industrial goods and processed food, a relatively large share of the observed price changes is reverted afterwards. With the exception of services, individual prices do not show signs of downward rigidity. On average, price decreases are as large as price increases. Price changes are determined both by state- and time-dependent factors. Accumulated price and wage inflation, wage adjustment due to indexation, the cash changeover and a larger number of competitors increase the probability of a price change, while pricing at attractive pricing points and price regulation have the opposite effect. JEL Classification: E31, C23, C41consumer prices, price setting, rigidity, sales, wage indexation

How persistent is disaggregate inflation? An analysis across EU 15 countries and HICP sub-indices

This paper analyses the degree of inflation persistence in the EU15, the euro area and each of its member states using disaggregate price indices from the Harmonised Index of Consumer Prices. Our results reveal substantial heterogeneity across countries and indices. The overall results, based on both parametric and non-parametric persistence measures, suggest a very moderate degree of median and mean inflation persistence. For most price indices we are able to reject the unit root hypothesis, as well as the notion of disaggregate inflation exhibiting a high degree of persistence. Durable goods and services tend to be relatively less persistent than other indices. Aggregation effects, both across indices and countries, tend to be present. We find structural breaks both owing to the change in the monetary regime and to the modified treatment of sales in the official HICP series. The latter tends to reduce the measured degree of inflation persistence. JEL Classification: E31, C21, C22, C14Aggregation effect, Inflation persistence, Mean reversion, structural breaks

Inflation persistence in Luxembourg: a comparison with EU15 countries at the disaggregate level

The aim of this paper is to analyse the degree of inflation persistence in Luxembourg using disaggregate price index data from the Harmonised Index of Consumer Prices. The degree of inflation persistence is then compared to estimates for the EU15 and for the euro area as well as for the individual member countries according to a unified approach. In order to assess the robustness of our estimates both a parametric and a non-parametric measure of inflation persistence is used. Overall, our results suggest a relatively low degree of inflation persistence in Luxembourg. For a large number of sub-indices we are not only able to reject the unit root hypothesis, but also we find a low degree of inflation persistence relative to other EU15 countries and relative to the EU15 and euro area aggregates. For Luxembourg as well as the other EU15 countries, our results suggest substantial heterogeneity in the degree of inflation persistence across sub-indices. We find some support for the presence of aggregation effects, both across indices and countries. Structural break tests for all EU15 countries suggest the presence of structural changes in the inflation process owing to the inception of the single monetary policy and/or to the modified treatment of sales.

Search in the product market and the real business cycle

We develop a search-matching model, where firms search for customers (e.g. in form of advertising). Firms use long-term contracts and bargain over prices, resulting in a price mark up above marginal cost, which is pro- cyclical and depends on firms’ relative bargaining power. Product market frictions decrease the steady state equilibrium, improve the cyclical properties of the model and provide a more realistic picture of firms’ business environment. This suggests that product market frictions may well be crucial in explaining business cycle fluctuations. Finally, we also show that welfare costs of price rigidities are negligible relative to welfare costs of frictions. JEL Classification: E10, E31, E32business cycle, Frictions, Price bargain, product market

Regulated and services’ prices and inflation persistence

This paper analyses the degree of price rigidity and of inflation persistence across different product categories with particular focus on regulated prices and services for the individual EU15 countries, as well as for the EU15 and the euro area aggregates. We show that services and HICP sub-indices considered being subject to price regulation exhibit larger degrees of nominal price rigidities, with less frequent but larger price index changes as well as stronger asymmetries between price index increases and decreases. With regard to what extent services and regulated prices contribute to the degree of overall inflation persistence, we find that, for most of the EU15 countries as well as for the EU15 and the euro area aggregates, excluding services from the full HICP results in a reduction in the measured degree of inflation persistence; for regulated indices such an effect is also discernible, albeit to a lesser extent. JEL Classification: E31, C22, C23, C43Inflation persistence, price rigidity, regulated prices, services

Monetary transmission: empirical evidence from Luxembourg firm level data

This paper investigates the transmission of monetary policy using data from a panel of Luxembourg firms. The results indicate that the sales accelerator may be at work. A very robust result is the negative effect of the user cost of capital on firms' investment ratio. Changes in user costs are significantly affected by changes in the monetary policy indicator. In addition, firm specific balance sheet characteristics, such as the lagged cash stock to capital ratio influence the investment behaviour according to the broad credit channel theory. Using various sample splits, it is shown that young firms, in particular, are more sensitive to user cost changes, sales growth and the lagged cash to capital ratio. JEL Classification: D21, D92, E22, E52credit channel, Investment, panel data, user cost of capital

Regional wages and market potential in the enlarged EU: An empirical investigation

This paper empirically analyses the link between market potential and regional wages in the enlarged EU. We extend previous studies of EU regions in several ways. 1) we analyze the link between market potential and wages for the EU27, 2) correct for spatial autocorrelation present in the data, showing that by neglecting spatial autocorrelation the strength of the relationship between market potential and wages may be underestimated, 3) decompose total market potential into several geographical components and analyze their respective contributions to explaining the geographical wage structure, and 4) explore which regions have gained the most from European integration by calculating counterfactual market potential if they could only trade with other regions within the same country.Market potential, market access, regional wages, distance, European Union

An analysis of regional commuting flows in the European Union

Regional labour mobility is of increasing concern in the context of the Single European Monetary Policy, as EMU implies a reduction of national policy options. Thus, it is important that the remaining adjustment mechanisms function effectively. While most of the empirical literature focuses on labour mobility in terms of migration, this paper provides an empirical assessment of the determinants of aggregate regional commuting flows in the EU, an issue often examined in a local or national context but still un(der)explored on EU level. Using an extended gravity framework, commuting is found to respond to differences in regional wages and unemployment, and to provide an equilibrating mechanism to labour market disequilibria. Higher levels of education and labour force participation of women, as well as a larger services sector are associated with a higher percentage of commuting. Finally, the results reveal interesting geographical differences between internal, border and coastal regions.Labour mobility, regional commuting, EMU, gravity model

New survey evidence on the pricing behaviour of Luxembourg firms

This paper analyses the pricing behaviour of Luxembourg firms based on survey evidence. Luxembourg firms typically have low market share, many competitors and longstanding customer relationships. Price discrimination is frequently applied. A majority of firms use price review rules that include elements of state dependency. The median firm reviews and changes prices twice a year. The results suggest an almost equal share of firms applying forwardlooking, backward-looking and rules of thumb behaviour. The adjustment speed is faster when cost goes up and demand goes down than in the opposite cases. The most relevant theories explaining price rigidity are implicit contracts, cost-based pricing and explicit contracts. Increases in labour and other costs are the most important factors leading to price increases; for price reductions it is price reductions by competitors followed by declining labour costs. JEL Classification: C21, C22, C14adjustment speed, price rigidity, price setting, survey data

The Immigrant/Native Wealth Gap in Germany, Italy and Luxembourg

This paper analyses the existence of an immigrant/native wealth gap by using household survey data for Luxembourg, Germany and Italy. The results show that, in all three countries, a sizeable wealth gap exists between natives and immigrants. Towards the upper tail of the wealth distribution the gap narrows to a small extent. This gap persists even after controlling for demographic characteristics, country of origin, cohort and age at migration although cross-country differences exist in the immigration penalty.household, survey data, wealth gap, immigrants, distribution