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"Inflationary Expectations and Price Setting Behavior," The Review of Economics and Statistics, February 1993, 8-18.
pdf file (913KB).

Abstract

This paper tests for the existence of expectational effects in very disaggregate price equations. Price equations are estimated using monthly data for each of 40 products. The dynamic specification of the equations is also tested, including whether the equations should be specified in level form or in change form.

The results support the hypothesis that aggregate price expectations affect individual pricing decisions. The results do not discriminate very well between the level and change forms of the price equation, although there is a slight edge for the level form. The lag and lead lengths are not estimated precisely. The average lag length is about 38 months, and the average lead length is about 5 months.

Comments

This paper uses the method in 1992#1 to test for expecational effects in price equations. A considerable amount of work went into collecting the (highly disaggregate) data for this study. The results strongly support the hypothesis that aggregate price expectations affect individual pricing decisions.