The Distributional Effects of Prices

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.

I expect the proposed research to have a broad impact, both in academia (researchers and economics students) and among government statistical agencies, policy-makers, and the general public.

The Academic Beneficiaries section of the grant proposal focuses on the impact of the proposed research in academia. Here I discuss the impact of the proposed research outside academia.

Cooperation with Governments, Central Banks and Statistical Agencies:

The new data and new tools developed in the proposed project are of direct relevance to international organizations, national governments and central banks; these institutions all need accurate inflation measures to make correct standard-of-living comparisons and to appropriately conduct monetary policy.
To ensure that the new statistics and tools are used by policymakers, I will constantly engage with the government administrations involved in the publication or use of price indices. I have already been invited to present the preliminary steps of this research at the French Central Bank and I expect that as the project develops I could give seminars at the Bank of England, the Federal Reserve, the European Central Bank, the Bureau of Labor Statistics, and the European Commission. I have scheduled several meetings and working sessions with officials at Insee (the French statistical agency). On the basis of these meetings, I expect that the new tools developed in the proposed project (such as the machine learning tools to run hedonic regressions, cf. part 1.b. in the "case for support") could be adopted by statistical agencies going forward.

Media Coverage and Public Debate:

Improving our understanding of the distributional effects of prices is very important for public debate. I expect the results of this project to be covered in leading news outlet. The new statistics on standards of living and inflation inequality, as well as the results on the price effects of specific policies (like import tariffs), are likely to generate strong media impact.

Thus, the general public will benefit because of the crucial role played by inequality measures in the public debate and by prices in the assessment of some policy changes (such as import tariffs, which are currently under scrutiny in several countries).

Pathway:

I will build a user-friendly website that will make available the new statistics on (1) standards of living across the world and (2) inflation inequality within countries. This website will policymakers, journalists and the general public to use these new statistics (for over 60 countries). The website will provide the demonstration that improved measures of standards of living and inflation can illuminate the public debate on inequality.