Comment on “Micro Price Dynamics during Japan's Lost Decades”

• DOI: http://doi.org/10.1111/aepr.12045
• Published date: 01 January 2014
• Date: 01 January 2014
• Author: Kosuke Aoki

Comment on “Micro Price Dynamics during

Japan’s Lost Decades”

Kosuke AOKI†

The University of Tokyo

JEL codes: E3, E31, E5

Sudo et al. (2014) use point of sales (POS) data to investigate micro price dynamics. POS

data are highly disaggregated, high-frequency data on retail prices. Macroeconomists

have been paying attention to micro price data not only because they are useful in testing

theories about the pricing decisions made by firms, but also because micro price data are

considered useful for understanding important macroeconomic questions, such as the

transmission mechanism of monetary policy and inflation dynamics.

Standard textbooks explain that, when prices are sticky, monetary policy can

affect the real interest rate, which in turn affects aggregate expenditure through the

intertemporal substitution of demand. This transmission mechanism is represented by,

for example, the Euler equation for consumption. Since micro price data are, by defini-

tion, disaggregated, they may provide rich information about agents’ behavior that lies

behind aggregate price data. For example, if one is interested in the degree of price sticki-

ness, it would be very useful to measure how frequently each firm changes its price. For

this reason, the measures of the frequency of price changes are useful for investigating

the degree of price stickiness. Another reason for looking at micro price data is that one

can study the heterogeneity of pricing decisions across firms.

Sudo et al. (2014) provide a number of interesting facts about Japanese micro price

data. In this comment, I focus my discussion on how to interpret two of their findings

from the viewpoint of macroeconomic theory. The first finding is that posted prices in

Japan are ten times as flexible as those in the USA. What is the implication of this for

macroeconomics? One might be tempted to conclude that monetary policy in Japan is

less effective since prices are more flexible. However, from a theoretical point of view,

what matters for consumption decisions is the cost per unit of consumption flow not the

price of unit consumption expenditure per se. As Aguiar and Hurst (2007) argue, con-

sumption flow is a product of purchased goods and home production. By spending more

time on home production, a consumer can save spending while achieving the same level

of consumption flow. Furthermore, purchasing goods requires shopping time. A con-

sumer can find a cheaper price by spending more time on shopping. This implies that

he/she can substitute his/her time (spent on shopping and home production) for the

amount of money spent on purchasing goods. A change in the price of the consumption

flow consists not only of a change in the price of purchased goods, but also a change in

†Correspondence: Kosuke Aoki, Faculty of Economics, The University of Tokyo, 7-3-1 Hongo,

Bunkyo-ku, Tokyo 113-0033, Japan. Email:kaoki@e.u-tokyo.ac.jp

bs_bs_banner

doi: 10.1111/aepr.12045 Asian Economic Policy Review (2014) 9, 65–66

© 2014 The Author

Asian Economic Policy Review © 2014 Japan Center for Economic Research 65