The Effects of Price Endings on Price Rigidity: Evidence from VAT Changes

39 Pages Posted: 13 Nov 2019

See all articles by Edward S. Knotek

Edward S. Knotek

Federal Reserve Bank of Cleveland

Doron Sayag

Hebrew University of Jerusalem

Avichai Snir

Netanya Academic College

Date Written: November 12, 2019

Abstract

We document a causal role for price endings in generating micro and macro price rigidity. Based on micro price data underlying the consumer price index in Israel, we document that most stores have a favored price ending—a final digit, usually a zero or nine, used by a majority of prices in that store—and that these favored price endings are utilized extensively. Using changes to the VAT rate as exogenous cost shocks that affect prices regardless of ending, we find that the frequency of price adjustment for nonfavored endings increases by twice as much as the frequency of adjustment for favored endings in months when the VAT rate changes. In the aggregate, sluggish pass-through of VAT rate changes is due to favored endings; changes in the VAT rate are passed through fully and immediately to nonfavored endings.

Keywords: sticky prices, favored price endings, zero-ending prices, nine-ending prices, pass-through

JEL Classification: E3, L11

Suggested Citation

Knotek, Edward S. and Sayag, Doron and Snir, Avichai, The Effects of Price Endings on Price Rigidity: Evidence from VAT Changes (November 12, 2019). FRB of Cleveland Working Paper No. 19-24, Available at SSRN: https://ssrn.com/abstract=3485785 or http://dx.doi.org/10.2139/ssrn.3485785

Edward S. Knotek (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Doron Sayag

Hebrew University of Jerusalem ( email )

Mount Scopus
Jerusalem, Jerusalem 91905
Israel

Avichai Snir

Netanya Academic College ( email )

1 University St
Netanya 42100, 4223587
Israel

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