The Distributional Effects of Prices

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This project asks two questions: (1) What are the implications of prices changes for inequality and standards of living? (2) To what extent do the price effects induced by policies alter the cost-benefit analysis of these policies? Despite extensive research, we currently lack detailed data as well as various empirical and theoretical tools to appropriately answer these questions. These questions are fundamental because it is well-known that individuals across the income distribution purchase different baskets of goods and services. Therefore, changes in prices or product availability over time can potentially have an important impact on inequality. Likewise, differences in prices across countries can have a profound impact on standards of living across countries. The few studies that have investigated these questions have used "macro" data (at a high level of aggregation), but I have shown in previous work (Jaravel 2017) that it is crucial to use "micro" data (i.e. very disaggregated data, at the product level) to accurately answer these questions.We know that policies may have large price effects (see Jaravel 2018 on the price effects of food stamps). For instance, increasing import tariffs is likely to result in higher prices for domestic consumers (which I have started investigating in ongoing work: Borusyak and Jaravel 2017 and Jaravel and Sager 2018). But we do not have a good understanding of how large this effect might be. Likewise, other important policies like income redistribution schemes or monetary policy could have significant effects on prices, which are not well understood currently. There are two main challenges to answer the two fundamental questions asked in this project. First, it is not easy to properly measure how prices change over time and across countries, because the set of available goods and services is always changing and detailed micro data is required. Second, it is challenging to understand the impact of policies on prices because of feedback loops. For instance, if a given policy makes a particular group of individuals richer, they might change their consumption patterns and start buying a different set of goods or services, which may have an impact on the income of other agents, who in turn will change their consumption patterns, etc.In this project, I propose to proceed in two steps, tackling each of these two major challenges in turn to advance our understanding of the effects of price changes and of their implications for major policies. The first part of the project aims at addressing three fundamental limitations in the literature on the measurement of "quality-adjusted" price changes (building on Jaravel 2017): (i) limited availability of scanner data across countries; (ii) limited use of hedonic regressions; and (iii) limited understanding of the welfare impact of house prices changes. Using new models and new empirical tools, the second part of the project aims at shedding new light on the welfare impact of three important types of policies, given their price effects: (i) optimal income and commodity taxation; (ii) trade policy (building on Borusyak and Jaravel 2017 and Jaravel and Sager 2018); and (iii) monetary policy.The various parts of this project constitute a cohesive whole. Taking a multi-faceted approach is the only way of making significant progress on understanding the effects of prices and their policy implications.This project has a strong potential for impact. In particular, it could change the type of inflation statistics published by national government agencies, as well as the type of standards-of-living statistics across countries published by international organisations. To ensure that the new data and new findings from the project are easily accessible by other researchers, policymakers, think tanks, as well as by the general public, the results and data will be made available online on a dedicated, user-friendly website.