Inflationary Expectations and Price Setting Behavior
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. Two expectational hypotheses are used, one in which expectations of the aggregate price level and one in which expectations are rational. Under the ﬁrst hypothesis the lag length is estimated along with the other parameters, and under the second hypothesis the lead length is estimated along with the other parameters. The results strongly 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, but in most cases the lag length is less than 30 months and the lead length is less than 5 months.
Fair, Ray C., "Inflationary Expectations and Price Setting Behavior" (1989). Cowles Foundation Discussion Papers. 1167.