Formal sector price discoveries: preliminary results from a developing country

Choudhary, M. Ali and Naeem, Saima and Faheem, Abdul and Hanif, Nadim and Pasha, Farooq (2011): Formal sector price discoveries: preliminary results from a developing country.

Abstract

We present preliminary results of 1086 structured interviews about price setting behavior of the formal firms in the manufacturing and services sector of Pakistan. Our key discoveries are that frequency of price change is considerably high in Pakistan, lowering the real impact of monetary policy. Price rigidity is explained mainly by firms caring about relative prices and the persistence of a given shock. The exchange rate and cost shocks are more important than financial and demand shocks for both setting prices and also the readiness with which these pass-through to the economy. Large firms change prices more frequently compared to smaller firms. Formal sector firms, especially medium sized firms, interact more with informal sector firms through the demand and supply channels. Formal firms highly connected with the informal sector have lower frequency of price changes. Formal sector firms hold lack of taxes and compliance with tax regime, i.e. enforcement, as the main reasons for the existence of the informal sector.

• Item Type: MPRA Paper
• Language: English
• Keywords: Price Setting, Developing Country
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

References

Agénor, Pierre-Richard and Montiel, Peter, J. (2010), Development Macroeconomics, 3rd Edition, Princeton University Press.

Amirault, David, Kwan, Carolyn and Wilkinson, Gordon. (2005), A Survey of the Price Setting Behaviour of Canadian Firms. Bank of Canada Review Winter 2004-2005, 29-40

Arby, Muhammad F., Hanif, Muhammad N. and Malik, Jahanzeb. (2010), The Size of Informal Economy in Pakistan. SBP Working Paper No. 33

Apel, Mikael, Friberg, Richard and Hallsten, Kerstin. (2005), Micro Foundations of Macroeconomic Price Adjustment: Survey Evidence from Swedish Firms. Journal of Money, Credit, and Banking 37:2, 313-338

Asplund, Marcus. Eriksson, Ricard and Friberg, Richard. (2000), Price Adjustments by a Gasoline Retail Chain. Scandinavian Journal of Economics 102:1, 101-121

Barrow, Robert J. (1972), A Theory of Monopolistic Price Adjustment. Review of Economic Studies 39:1, 17-26

Bils, Mark and Klenow, Peter J. (2004), Some Evidence on the Importance of sticky Prices. Journal of Political Economy 112:5, 947-985

Blinder, Alan S. (1991),Why are Prices Sticky? : Preliminary Results from an interview Study. American Economic Review 81:2, 89-96

Blinder, Alan S., Canetti, Elie D., Lebow, David E. and Rudd, Jeremy B. (1998), Asking About Prices: A New Approach to Understanding Price Stickiness, Russel Sage Foundation: New York

Calvo, Guillermo A. (1983), Staggered Pricing in a Utility Maximizing Framework. Journal of Monetary Economics 12:3, 383-398

Caplin, Andrew S. and Leahy, John V. (1997), Aggregation and Optimization with State-Dependent Pricing.Econometrica 65:3, 601-625

Carlton, Dennis. (1986), Rigidity of Prices. American Economic Review 76:4, 637-658

Castells, Manuel and Portes, Alejandro. (1989), World Underneath: The Origins, Dynamics, and Effects of the Informal Economy, in Portes, A., Castells, M. and Benton, L. (eds.) The Informal Ec onomy .Studies in Advanced and Less Developed Countries, Baltimore and London, The Johns Hopkins University Press, 11-37

Cecchetti , Stephen G. (1986): The Frequency of Price Adjustment. A Study of the Newsstand Prices of Magazines. Journal of Econometrics, 31, 255. 274.

De Soto, Hernando. (1989), The Other Path, New York: Harper and Row.

De Soto, Hernando. (2000), Mystery of Capital: Why Capitalism Triumphs in the West & Fails Everywhere Else, New York Random House.

Fabiani, Silvia., Loupias, Claire, Martins, Fernando and Sabbatini, Roberto. (2007), Pricing Decisions In The Euro Area: How Firms Set Prices and why, Oxford University Press.

Frankel, Jeffrey A., (2010), Monetary Policy in Emerging Markets: A Survey, NBER Working Paper 16125. Hall, Simon, Walsh, Mark, and Yates, Antony (2000), Are UK Companies.Prices Sticky? Oxford Economic Papers 52, 425-446

Hart, Keith. (1973), Informal Income Opportunities and Urban Employment in Ghana. Journal of Modern African Studies, 11:1, 61-89

Kashyap, Anil K. (1995), Sticky Prices: New Evidence from Retail Catalogs. Quarterly Journal of Economics 110:1, 245-274

Kwapil, Claudia, Baumgartner, Josef and Scharler, Johann. (2005) The Price Setting Behaviour of Austrian Firms: Some Survey Evidence. European Central Bank (working Paper No.464)

Levy, Daniel, Dutta, Shantanu and Bergen, Mark. (2002), Heterogeneity in Price Rigidity: Evidence from Case Study Using Microlevel Data. Journal of Money, Credit, and Banking 34:1, 197-220

Loupias, Claire and Ricart, Roland. (2004), Price Setting in France: New Evidence from Survey Data. European Central Bank (working Paper No.423)

Malik, Waseem S., Satti, Ahsanul H. and Saghir Ghulam. (2010), Price Setting Behaviour of Pakistani Firms: Evidence from Four Industrial Cities of Punjab, PIDE Working Paper, 65.

Martins, Fernando (2005), The Price Setting Behaviour of Portuguese Firms: Evidence from Survey Data. European Central Bank (working Paper No.562)

Moser, Caroline O. N. (1978), Informal sector or petty commodity production: dualism or dependence in urban development? World Development 6:9-10, 1041-1064.

Nakamura, Emi and Steisson, J´on. (2008). Five facts about prices: A reevaluation of menu cost models, Quarterly Journal of Economics 123:4, 1415-1464

Pakistan, Government of (2009), Labour Force Survey, 2008-09. Islamabad: Federal Bureau of Statistics, Statistics Division.

Perry, Guillermo E., Maloney, William F., Arias, Omar. (2007). Informality: Exit and Exclusion. Washington, DC, World Bank.

Rotemberg, Julio J. (1982), Sticky Prices in the United States. Journal of Political Economy 90:6, 1187-1211.

Sheshinski, Eytan and Weiss, Yoram. (1983), Optimum Pricing Policy Under Stochastic Inflation. Review of Economic Studies 50:3, 513-529

Taylor, Jhon B. (1980). Staggered wage and price setting in macroeconomics,Journal of Political Economy 88:1, 1.23

Taylor, John B. (1999), Staggered Price and Wage Setting in Macroeconomics. in John B. Taylor and Michael Woodford (eds.). Handbook of Macroeconomics, pp. 1009-1050. Elsevier, New York.