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"Inflationary Expectations and Price Setting
The Review of Economics and Statistics, February 1993, 8-18.
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.
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