2019-13 | April 2019
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Using Brexit to Identify the Nature of Price Rigidities
Using price quote data that underpin the official U.K. consumer price index (CPI), we analyze the effects of the unexpected passing of the Brexit referendum to the dynamics of price adjustments. The sizable depreciation of the British pound that immediately followed Brexit works as a quasi-experiment, enabling us to study the transmission of a large common marginal cost shock to inflation as well as the distribution of prices within granular product categories. A large portion of the inflationary effect is attributable to the size of price adjustments, implying that a time-dependent price-setting model can match the response of aggregate inflation reasonably well. The state-dependent model fares better in capturing the endogenous selection of price changes at the lower end of the price distribution, however, it misses on the magnitude of the adjustment conditional on selection.
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Hobijn, Bart, Fernanda Nechio, and Adam Hale Shapiro. 2019. "Using Brexit to Identify the Nature of Price Rigidities," Federal Reserve Bank of San Francisco Working Paper 2019-13. Available at https://doi.org/10.24148/wp2019-13