Ernesto Pasten, Banco Central de Chile

Sala de Postgrado, 4° piso, Instituto de Economía

Presentador: Ernesto Pasten, Banco Central de Chile
Coautores: Boragan Aruoba, Andres Fernandez, Daniel Guzman y Felipe Saffie
Paper: Pricing under distress

Abstract: When uncertainty increases it creates two confounding effects: a realization effectand an anticipation effect. These two effects may have opposing results on currentbehavior. By using a quasi natural experiment focusing on the pricing behavior ofsupermarkets during the 2019 riots in Chile we identify the consequences of the an-ticipation effect: during the 31-day period following the riots supermarkets reduce thefrequency of price changes by about 50% and conditional on a price change, the ab-solute magnitude of price changes is about 50% larger. We attribute these changesto the arrival of news about a future increase in idiosyncratic demand dispersion. Wedevelop a quantitative menu cost model and calibrate it using Chilean product-leveldata. Only news about future demand dispersion can deliver simultaneously less fre-quent and conditionally larger price changes. The effectiveness of monetary policyinterventions crucially depends on the timing of the intervention relative to the arrivalof the news and whether or not the change materializes. In particular, while the real-ization of uncertainty decreases the effectiveness of monetary policy, monetary policyis more effective when the news about future volatility arrives.