Economic Uncertainty and Norwegian Producer Prices : An empirical study of the relationship between uncertainty and producer prices in Norway with evidence from Norwegian PPI data in the period of 2005 - 2016

Abstract

In this study, we investigate the relationship between uncertainty and the price-setting of production companies. To investigate this, we use micro-data underlying the Norwegian Producer Price Index ranging from 2005-2016. We construct a new uncertainty index based on textual analysis. We utilise this measure and recently developed methodologies to indirectly quantify the effect of uncertainty. The measures are Economic Policy Uncertainty (EPU) in Norway, Global Economic Policy Uncertainty (GEPU), the Norwegian Volatility index (Novix), Macroeconomic uncertainty in the USA, and three uncertainty indices for measuring uncertainty in Norway. By utilising a multinomial logistic model, we compare the uncertainty measures to the price fluctuations and analyse if uncertainty affects price-setting in Norway. We find a statistically significant effect of uncertainty on the probability of price changes. Our findings indicate that uncertainty and prices are counter-cyclical. An increase in uncertainty will increase the probability of a negative price change and decrease the probability of a positive price change. The results are important as they show a clear connection between uncertainty and price adjustments for production companies.