Inflation Dynamics

This thesis studies inflation dynamics, investigating both reasons why prices change, and why they sometimes do not. It investigates four areas that are of interest to monetary policy makers, but where our knowledge is incomplete.  The first area investigated is the causes of price stickiness at the firm level. Insight is given by a large survey of price-setting behaviour of New Zealand firms. There is a large degree of heterogeneity in price-setting practices between, and within, sectors. Explicit contracts, implicit contracts and strategic complementarity are the most widely recognised causes of price rigidity. Menu costs and sticky information are not widely recognised.  The second area investigated is how exporters price, and in particular the decisions over currency of invoice and whether to differentiate prices across markets. In sharp contrast to commonly held views, we find that primary sector firms do differentiate prices across markets. Indeed, these firms are more likely to do so in New Zealand than firms in other sectors. Larger, and more productive firms, are more likely to differentiate prices.  This thesis then studies the influence that global inflation factors have on domestic inflation. A CPI database for 223 countries and territories extends the previous research, which focuses on high income countries. Global factors explain a large share of the variance of national inflation rates in advanced countries, but not for less developed countries. More generally, global factors have greater influence in countries with higher GDP per capita, financial development and central bank transparency. Global factors explain a large share of the variance of food and energy prices but a much smaller share of the variance of other sub-components.  Finally, this thesis carries out the first systematic analysis of the impact on inflation of disasters caused by natural hazards. There is a large degree of heterogeneity, with disasters having little significant effect in advanced countries, but having effects that can persist for years in developing economies. There are also differences between types of disasters and sub-indices of inflation. Storms have a short-run impact on food price inflation that lasts for the first two quarters, before being reversed in the subsequent two. Earthquakes reduce CPI inflation excluding food, housing and energy.