Bunn and Ellis suggested that comparing the probability of price change in a different period could help them find if the time-dependent models match their data. These models have the same probability on price flexibility in each stage. There are two ways to examine this one is comparing the frequency of price adjustment in different time period; the other is to draw the diagram of the hazard function.
In their study, the correlation coefficient between price increasing rate and inflation is 0.6, which indicated there is a positive relationship. Instead, there is little correlation between share of decreasing price and inflation. (Figure 4) Meanwhile, Bunn and Ellis hold the point that the theory of time-dependent model is inconsistent with the changes on frequency of the price flexibility.
In addition, their study shows there is around 35% of price falls without the short-term promotion, which suggest that the downward nominal rigidities may not have strong influence in the production in the UK markets. According to the price adjustments in micro-data, Bunn and Ellis found that January and April are more likely to reduce prices compares to any other months across the year.
2.4 The size of the consumer price change
Bunn and Ellis considered that it may help to verify the most relevant state-dependent models by measuring the size of UK individual price changes according to their data. The research on the distribution of price changes could show the degree of the downward rigidity in product market. Meanwhile this rigidity may be relevant to the price falls especially with the small range of price cut.
Once more, the behaviour of consumer goods differs from the service, whi...
... middle of paper ...
...y of price change among the different product group, specifically price change for good are more frequently than services. Fourthly, there is a wide range of distribution for the Price change however some of the figures nearly did not change.
These outcomes in Bunn and Ellis’s observations are similar to the other international researches on the individual pricing behaviours. The probability of the price changing varying in the different time period and the heterogeneity between the different product groups which is demonstrated by the data seems extraordinary. In their study for UK micro-data they discovered that there is higher frequency in actual price than it applied in the macroeconomic models. Because the existed models did not match their observation precisely, they suggested creating a new model or assumption to describe the behaviour of the price-setting.
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