Micro-level Price Setting Behaviour in India: Evidence from Group and Sub-Group Level CPI-IW Data
Publication dateDec, 2017
DetailsNIPFP Working Paper No. 217
AuthorsShesadri Banerjee, and Rudrani Bhattacharya
In the contemporary literature on macroeconomics, the mainstream frameworks for policy evaluation have recognized the significance of price rigidities emerging from the micro-level pricing behaviour of firms for explaining the short and medium run effects of monetary policy interventions. In this study, we evaluate stickiness in price adjustment for the aggregate Consumer Price Index for Industrial Workers (CPI-IW) and its major components in the context of Indian economy. Our findings broadly suggest greater monthly frequency of price changes and lower duration of price spell for food group, compared to non-food group. After controlling for small price changes due to sector-specific idiosyncratic shocks, stickiness in price-adjustment increases drastically for food components, corroborating to the high inflation persistence observed in the food sector in India in the recent past. We also find evidence of exogenous versus menu-cost driven pricing behaviour in India.
Keywords: Price stickiness, Time-dependent, State-dependent, Dip test, Silverman test, Indian economy.
JEL Classification Codes: E31, E52, E58