ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Evidences from Consumer Price Index for Industrial Workers

Micro-level Price Setting Behaviour in India

In the contemporary literature of macroeconomics, the mainstream frameworks for policy evaluation have recognised the significance of price rigidities, emerging from the micro-level pricing behaviour of firms, to explain the short- and medium-run effects of monetary policy interventions. The stickiness in price adjustment is evaluated in the context of the Indian economy by using the Consumer Price Index for Industrial Workers data. The findings suggest that the monthly frequency of price changes is greater for the food group compared to the non-food group, and evidences are also found of exogenous versus menu cost-driven pricing behaviour in India.

In the contemporary literature of macroeconomics, the mainstream frameworks for policy evaluation have recognised the significance of price rigidities, emerging from the micro-level pricing behaviour of firms, to explain the short- and medium-run effects of monetary policy interventions (Gali 2002, 2008; Woodford 2003). With the progress of analytical techniques, a strand of theoretical literature on price stickiness has been shaped (Rotemberg 1982; Calvo 1983; Taylor 1999). Over the years, researchers have identified the role of price rigidity and subsequently, the price setting mechanism of the firms in the dynamic interactions between inflation and output, and the conduct of monetary policy in the economy.

Given the significant policy implications of the micro-level price setting behaviour, it was much needed to find the empirical evidence for the theoretical conjecture of price rigidity. Starting from the work of Klenow and Bils (2004), several studies are carried out across different countries in order to evaluate the degree of price stickiness from different perspectives. Following this stream of literature, we present a set of stylised facts on the frequency, size and distribution of price changes in the context of Indian economy, from the aggregate Consumer Price Index for Industrial Workers (CPI-IW) and its major components.

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Updated On : 16th Dec, 2019

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