Price Adjustment Lags and Their Asymmetries in Vietnam

Abstract

The paper aims to investigate factors that influence the speed of price adjustment in response to shocks by Vietnamese firms using a multivariate ordered probit model with survey data. The results first indicate that whether state or time-dependent price reviewing causes firms to adjust their prices faster after shocks may depend critically on not only the size of shocks but also the economic conditions. Second, we provide evidence that firms used the rule of thumb in price setting tend to adjust their prices more slowly in response to all kind of shocks than their counterparts who based on the market conditions, and that firms whose prices are influenced by competitors tend to be more flexible in reaction to shocks. In addition, we find that menu costs and contracts are the two most important theories in explaining price stickiness. However, they seem to induce firms to respond more slowly only to shocks that drive prices downwards, rather than to shocks that move prices upwards. Finally, the degree of competition, the market share, the size of firms, the practice of quantity discounts, the share of state ownership, and the sector where firms operate all matter for how quickly and asymmetrically firms react to shocks.

Keywords: Price adjustment; survey data; multivariate ordered probit;