The Distributional Impact of Price Changes over the Business Cycle

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The PIs plan to use data on retail prices and consumer expenditures to evaluate how retail prices change in response to business cycle shocks. They seek to determine whether or not goods that are consumed in large quantities by low-income households respond in a different way than goods consumed primarily by high-income households. We know from previous research that the composition of a household's consumption varies with income. In other words, we know that poor households consume more of some goods, while higher income households consume more of so-called 'luxury' goods. Understanding how prices of these goods change with macroeconomic shocks is important. If goods consumed by low income households become relatively more expensive under inflation, then inflation increases inequality; high income households see a smaller relative increase in the prices of the goods they buy. The results of this research are important for understanding the causes of inequality. They are also important for monetary policymakers; the results will help clarify the distributional effects of monetary policy and also help to explain how a monetary shock passes through a closed economy. The PIs will also train graduate students in the necessary data analysis methods through work as research assistants.The PIs study these distributional consequences over the business cycle by using barcode level retail price data and consumer expenditure data. The first part studies the distributional implications of large exchange rate devaluations using price and consumer expenditure data from Mexico. This part of the project cannot be completed with U.S. data because the dollar has not seen large and unexpected devaluations. This work is relevant for understanding the effects of policies like Grexit and Brexit that carry significant implications for exchange rates. The second part of the project uses barcode level data from the US to study relative price dynamics over the business cycle and their differential impact across households of different incomes. In particular, the PIs will consider whether the relative prices of items consumed disproportionately by the poor increase during economic downturns and whether the poor consume goods whose prices are less sticky and are therefore more sensitive to monetary policy.