The primary focus of this thesis is on price movements at market levels. This thesisexamines the measurement of two aspects of price movements: the degree of pricerigidity and pure price change. Price is defined to be rigid if its response to a demandor cost shock is slow and the magnitude of adjustment is proportionately lessthan the shock. Price rigidity is one of the critical issues in the microfoundationsof macroeconomics, and its importance has been documented at least since Keynes'(1936) The General Theory of Employment, Interest and Money. Regarding pureprice change, in many markets the measurement of pure price change is difficult toobtain because the observed prices are contaminated by quality and compositionalchanges in the products. The literature on price indexes emphasises the importanceof accounting for quality change at the market level. These issues will be explored inthis thesis. The chapters of this thesis provide distinct but complementary contributionsto the literature of price movement. Chapter 2 uses vector error correctionmodels to estimate the degree of price rigidity in the retail coffee markets of 17different countries. A stylised fact that emerges from the work is that price adjustmenttypically occurs within two quarters after a shock is imposed. In terms of themagnitude of price changes, prices are found to be more rigid to cost shocks than toforeign shocks. Chapter 3 explores the extent to which products follow systematicpricing patterns over their life cycle and the impact this has on the measurement ofinflation. A number of specifications of hedonic models have been applied to dataon supermarket and electronic products. Strong evidence of systematic life cycleeffects has been found. Chapter 4 develops an hedonic regression model to constructmultilateral indexes-indexes that are consistent across time and space-inhousing markets. The set-up of the hedonic model attains some desirable properties,both in terms of statistical and index number perspectives. Applied to houseprices in Sydney, the model generated some interesting results, including that thecheaper regions exhibit greater price dynamics than the more expensive regions.Some potential areas for further research are also considered.
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