Price Setting Behaviour: Micro Evidence on Slovakia

The paper provides an empirical analysis of price setting behaviour in Slovakia, using large micro-level dataset covering about 57% of Slovak CPI for the period 1997-2001. The novelty of the paper is the analysis of a country characterized by nearly double-digit inflation and undergoing massive changes in market structure during the process of transition and accession to the EU. Several empirical findings stand out. Similarly to results on advanced market economies, we find that price changes are infrequent and sizeable. Moreover, the relationship between frequency and size of price changes is highly non-linear. Product-specific inflation is typically highly persistent. We find that market structure is an important determinant of pricing behaviour. The dispersion of prices is higher while persistence is lower in the non-tradable sectors, suggesting that higher competition in goods markets is not conducive to lower persistence. An important implication is that increasing market competition brought about by entry in the EU will not necessarily lead to lower persistence. By contrast, the increasing share of services in consumption will reduce persistence. Our results, together with the finding that the frequency of price changes depends negatively on the price dispersion and positively on the individual inflation, seems consistent with predictions of Calvo’s staggered price model.