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Discussion Paper Details

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Title: On the importance of sectoral and regional shocks for price-setting

Author(s): G�nter Beck, Kirstin Hubrich and Massimiliano Marcellino

Publication Date: April 2011

Keyword(s): common factor models, disaggregated prices and euro area regional and sectoral inflation

Programme Area(s): International Macroeconomics

Abstract: We use a novel disaggregate sectoral euro area data set with a regional breakdown to investigate price changes and suggest a new method to extract factors from over-lapping data blocks. This allows us to separately estimate aggregate, sectoral, country-specific and regional components of price changes. We thereby provide an improved estimate of the sectoral factor in comparison with previous literature, which decomposes price changes into an aggregate and idiosyncratic component only, and interprets the latter as sectoral. We find that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. We further contribute to the literature on price setting by providing evidence that country- and region-specific factors play an important role in addition to the sector-specific factors. We conclude that sectoral price changes have a "geographical" dimension, that leads to new insights regarding the properties of sectoral price changes.

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Bibliographic Reference

Beck, G, Hubrich, K and Marcellino, M. 2011. 'On the importance of sectoral and regional shocks for price-setting'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8357