Price setting behaviour in Latvia: Econometric evidence from CPI micro data

This paper discovers the driving forces behind Latvian firms' decisions to adjust prices by using various panel logit models, which explain the probability of observing price change by a broad set of exogenous variables. The results show that the consumer price formation in Latvia is a combination of both state-dependent and time-dependent behaviours. On the one hand, frequency of price changes depends on inflation, demand conditions, and the size of last price changes. On the other hand, we observe some elements of time-dependent price setting like price truncation and strong seasonal pattern. We also find several important differences in the price setting behaviour in cases of price increases and decreases. The fact that frequency of price changes in Latvia depends on inflation as well as demand and supply conditions allows for faster price adjustment process in the event of high distortions in the economy.