Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

Abstract: Using detailed Swedish micro data on prices and costs, this paper documents a decrease in the dispersion of changes in prices and markups following the introduction of an official inflation target of 2 percent. Using a structural model to decompose the change in the price-change distribution by potential explanatory factors, about 63 percent of the decrease in the price-change dispersion can be attributed to a decrease in the cross-sectional variance of inflation expectations. The lower dispersion of inflation expectations results in a lower markup dispersion and a welfare gain equivalent to a 0.79 percent increase in consumption.

Keywords: Inflation targeting; price setting; misallocation; welfare

JEL-codes: D84; E52; L11

67 pages, April 1, 2019

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