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Disaggregated prices appear sticky in response to monetary and macroeconomic disturbances but flexible in response to shocks covering specific sectors. Sector-specific shocks account for about 85% of the monthly fluctuations of disaggregated prices.

We seek to demonstrate the variations in the exchange rate pass-through (ERPT) and identify the shift in the price-setting behavior by placing the emphasis on the implemented exchange rate and monetary policy regimes. Having a history of several distinct monetary regimes, Turkey exhibits a genuine laboratory in this respect. Our empirical results reveal that the pass-through from exchange rates to domestic prices has changed dramatically. We detect breaks in the pass-through coefficients at three episodes, all of which coincide with a shift in monetary/exchange rate regime, lending support to the view that monetary and exchange rate regimes might be among the major determinants of the ERPT process. (JEL C51, E31, E58), I. INTRODUCTION Understanding and quantifying the impact of exchange rate shocks on the domestic prices has always been of interest to both academicians and the central banks. The fact that [...]

A New Keynesian model that uses sticky prices and fair wages to study unemployment and labor productivity increase in the American economy is presented.

While it is well known that demand elasticities calculated at the macro level will in general differ from those calculated at the micro level because of aggregation effects, there remain the questions of how large the effects are and how they vary with the degree of inequality in the income distribution. We explore these questions with models based on a quadratic version of the Almost Ideal Demand System. We investigate the elasticity differences theoretically and then calibrate the models and generate numerical results, using income data for seven countries with widely different distributions. The aggregation effects are found generally to be rather small, even with highly unequal income distributions. Effets d'agregation sur les elasticites par rapport aux prix et aux depenses dans un systeme de demande quadratique quasi-ideal. S'il est bien connu que les elasticites de la demande calculees au niveau macro different en general de celles calculees au niveau micro cause des effets d'agregation, il reste a decouvrir la taille de ces effets, et jusqu'a quel point ils varient avec l'accroissement de l'inegalite dans la repartition des revenus. Les auteurs explorent ces questions avec des modules fondes sur une version quadratique du systeme de demande quasi-ideal. On etudie les differences d'elasticites au plan theorique, puis on calibre les modeles et on genere des resultats numeriques a l'aide de donnees sur les revenus de sept pays qui ont des repartitions de revenus tres differentes. Il appert que les effets d'agregation sont generalement faibles meme pour des repartitions de revenus fort inegales.

The possible long-run relationships among money, output, trade balance, price, and exchange rates of fixed and flexible exchange rate regimes are examined. Monthly economic data for Greece is used, covering the period from January 1960 to March 1994.

The fiscal theory of price determination suggests that if primary surpluses evolve independently of government debt, the equilibrium price level 'jumps' to assure fiscal solvency. In this non-Ricardian regime, fiscal policy--not monetary policy-provides the nominal anchor. Alternatively, in a Ricardian regime, primary surpluses are expected to respond to debt in a way that assures fiscal solvency, and the price level is determined in conventional ways. This paper argues that Ricardian regimes are as theoretically plausible as non-Ricardian regimes, and provide a more plausible interpretation of certain aspects of the postwar U.S. data than do non-Ricardian regimes. (JEL E60, E63)

We construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations. These fluctuations include persistent movements in output along with the other defining features of business cycles, like volatile investment and smooth consumption. We assume that prices are exogenously sticky for a short time. Persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so. We find that for a wide range of parameter values, the amount of endogenous stickiness is small. Thus, we find that in a standard quantitative model, staggered price-setting, alone, does not generate business cycle fluctuations.

A discussion of monetary theory is presented, focusing on quantity theory. Topics include price, economic equilibrium, purchasing power, and banking.

This article analyzes the impact of transaction (search) costs and capacity constraints in an almost competitive market with homogeneous firms that compete on price. We characterize conditions under which Nash equilibria with price dispersion exist; in equilibrium, firms play pure strategies in prices and consumers adopt a symmetric mixed search strategy. Price dispersion is possible even though consumers all have the same search cost and valuation for the item and prices charged by all firms are common knowledge.

A data-determined method is proposed to test for the law of one price as a long-run equilibrium condition and to identify which markets in a network of spatially dispersed commodity markets quote the reference price. The method consists of supplementing Johansen's FIML cointegration procedure with a permanent-transitory decomposition and rules of inference in linear time-series models with unit roots. As an example, we apply our method to prices of six corn markets in Benin. We find that the law of one price holds in the long-run. It appears that two rural markets quote the reference price: their prices adjust fastest towards the permanent change induced by the common stochastic trend.

Research was conducted to examine the role of sliding scales and wage flexibility in early 1920s Britain. The objective was to take into account their possible contribution using cross-sectional industry data. Data were taken from wage level information for 49 industries for 1920 and 1924 and supplemented with data from the Labour Gazette and the UK 1924 Census of Production on industry characteristics. Results indicate that sliding scales had little effect on wage-setting during the rapid deflation of the early 1920s.

We study supply contracts for deterministic demand but in an environment of uncertain prices. We develop valuation methodologies for different types of supply contracts. A 'time-inflexible contract' requires the firm to specify not only how many units it will purchase, but also the timing of the purchase. A 'time-flexible contract' allows the firm to specify the purchase amount over a given period of time without specifying the exact time of purchase. Other than time flexibility, the suppliers may offer 'quantity flexibility' to the firm as well, i.e., purchase quantities could be within a prespecified quantity window. Finally, 'risk-sharing' features can be incorporated in the contract in terms of the purchase price that the firm eventually pays to a supplier. Within a prespecified price window the firm pays the realized price, but outside of it the firm shares, in an agreed way, added costs or benefits. Given the structure of a supply contract, we study the firm's decision when to purchase and how many units in each purchase such that the expected net present value of the purchase cost plus inventory holding cost is minimized. We discuss optimal purchasing strategies for both time-flexible and time-inflexible contracts with risk-sharing features. Other interesting results include the analysis of two-supplier sourcing environments and the exploitation of quantity flexibility in such contracts. Our discussion illustrates how time flexibility, quantity flexibility, supplier selection, and risk sharing, when carefully exercised can effectively reduce the sourcing cost in environments of price uncertainty. Keywords: Supply Contracts; Global Operations; Flexibility; Binomial Lattice

A modeling approach was employed to study the impact of price increases for gasoline and electricity on the struggle of Mexico to recover from its economic problems. The model employs the Shoven and Whalley tax analysis research method and considers the differences in preferences of consumers as a function of their incomes and specifies a distinct demand system for each group of households. Results showed that the price increases are beneficial because of the reduction in consumption of gasoline, resulting in less carbon emissions. While some sectors will be affected negatively, it appears that the price increases are justified.

A study was conducted to analyze the hypothesis that large economic fluctuations are the result of problems of adjustments to disturbances, particularly the adjustments of prices and wages. The premise that shocks lead to significant changes in relative prices because different prices are determined in different ways was examined. Results indicated that a dynamic portfolio theory of adjustment explains the slow speeds of adjustments and rigidities.

A study was conducted to show that the response of inflation to aggregate product demand shocks and the association between aggregate output changes and such shocks correlate with lags between inputs and outputs in the production process. Results indicated that production lags are not sufficient to produce real effects of monetary shocks during assumptions that the real interest rate is unaffected by the rate of inflation.

Arthur Burns, Chairman of the Federal Open Market Committee of the Federal Reserve System from February 1970 until December 1977, was fiercely opposed to inflation. Yet, over his eight-year tenure, prices increased at an annualized rate of 6.5 percent. Why? One reason was Burns's belief that inflation arose from a variety of special factors, each of which was largely out of the control of the Federal Reserve., Arthur Burns, Chairman of the Federal Open Market Committee (FOMC) of the Federal Reserve System (the Fed) from February 1970 until December 1977, was fiercely opposed to inflation. For the [...]

Long-term prices vary with changes in distribution such as an increase in the profit rate. The link between long-term prices and distribution is complex, but there are certain laws that affect price movements in terms of wages. This movement can be expressed in terms of problems relating to linear programming. It is possible to obtain sufficient or necessary conditions linked to the convexity of curves showing wage and profit relationships. Relative prices vary in an arbitrary way, which is a basic negative result in terms of capital theory.

Economic theorist Knut Wicksell emphasized the connection between economic activity and falling prices and their importance in forming monetary policy. Wicksell attributed the global deflation experienced in the early 1920s to wavelike shocks produced by irregular technological advancements in a developing economy, but he did not subscribe to the popular theory that price stability would eradicate the business cycle.

Using price and wage equations, an aggregate supply relationship is derived, which relates domestic to foreign prices and output. It is shown that, among all parameters, only the degree of wage indexation matters to the question of whether the nominal exchange rate can affect competitiveness. Cointegration results support the existence of a long-mn relationship among the variables of the model which is in conformity with the relationship derived in the theoretical part of the paper. Empirical analysis (a) does not confirm relative Purchase Power Parity for Greek wholesale price indices, and (b) does not contradict the hypothesis that Greek producer prices are homogeneous of degree one in foreign prices. Keywords: Supply equation; Real exchange rate; Cointegration; Homogeneity tests; Purchasing power parity

One of the costs of high levels of inflation maybe misperceptions of relative prices and excessive volatility in sectoral output. This paper therefore examines the relationship between the level of [...]

We established a comprehensive set of stylized facts for intranational business cycles across states and regions in the U.S. Notable findings are that the cross correlations of our consumption measure is much less than that for output, and the volatility of the real exchange rate between states is much less than that for output. These findings are contrasted with the quantity and price 'anomalies' found in international business cycle data. Additional results for labour and non-labour earnings suggest that the observed amount of intratemporal risk sharing is quite limited as compared to that for intertemporal risk sharing. Keywords: Open Economy RBC models: Risk sharing: Price and quantity anomalies

The general belief in free international trade and low inflation is held by all major economists. Economists call inflation the disease that has the ability to break down economies. In addition, the cost of living should be maintained if low inflation is desired. Consequently, price stability is important and it would be followed by high employment and economic growth.

Studies have revealed that technical trading rules produce profits only in periods of intervention, when monetary authorities are trading to influence exchange rates and are willing to lose money in pursuit of their objectives. It has been found that in international financial markets, investors usually focus their sights on the stocks and bonds of their own country since they have better knowledge of the financial markets in their home country than in foreign assets. This bias among investors prevents them from diversifying internationally., Asset pricing - the study of markets for financial assets including stocks, bonds, foreign currencies, and derivatives - is a field in which there is an intense and fruitful interaction [...]

This paper analyzes a monopolistic firm's pricing and choice of technique decisions, when it faces a random demand and must incur a fixed menu cost to adjust its price to demand shocks. We show that price adjustment costs have the same effect as an increase in the variability of demand, in that the firm will choose a technique yielding a flatter short-term marginal cost curve. Making the production technique endogenous widens the range of demand shifts that will be accommodated with an unchanged price; it allows for less price variation and more quantity variation when it is profitable to pay the menu cost and adjust the price. Keywords: Menu cost; Price rigidity; Business cycle; Monopolistic competition; Random demand; Flexibility

A simple macromodel was developed to analyze different theories of aggregate output and price behavior, particularly the implications of alternative exogeneity assumptions. The analytical framework was also used to determine the effects of closure rules established by dynamic interdependent investment and markup decisions of a representative firm. Findings reveal that the elasticity of substitution between labor and capital is likely to be small, as are changes in the wage-rental ratio. Also, even if these likelihoods fail to materialize, product-market equilibrium cannot be restored by variations in the labor-capital and wage-rental ratios by themselves.

Both inflation rate uncertainty and relative price variability yield significant effects on investment and consequently, on business cycles and economic growth. The effect of inflation rate uncertainty on investment can be favorable in the long term, but is constrained by the time it entails to obtain relevant information on actual prices. That of relative price variability, on the other hand, is negative and worse, reduces the efficiency of the price information system. It thus renders weak one of the most significant ways of achieving efficient resource allocation.

There exists an upper hemi-continuity of rational expectations equilibria in two-period sequence economies with symmetric information when the state space is uncountable. This is proven through the closed-graph property of the relation linking first-period allocations to support prices that can be rationalized by expectations of state-contingent, second-period prices corresponding to some temporary equilibrium for the given first-period allocation.

The relationship between nominal price rigidity on one hand and inflation, business cycles and output was examined in a dynamic general equilibrium model composed of households, firms and government, taking into account post-war economic data. It was concluded that nominal price rigidity models offered a better explanation of the association between output and inflation compared to flexible price models. It was further suggested that an endogenous money supply would have little effect on the results of the model.

I. Introduction The link between price rigidity and market structure has long been a topic of interest to researchers in both macroeconomics and industrial organization. Research on this subject, with [...]

INTRODUCTION In an influential paper, Hamilton (1983) found within a vector autoregression (VAR) framework that oil price change has a strong causal and negative correlation with real U.S. GNP growth [...]

China's use of the mandatory quota (MQ) system was investigated in a partial equilibrium model incorporating a time frame. The MQ system is part of China's economic reform policy in transforming their centrally-planned economy to a market-oriented economy. In the MQ system, some goods allocated under a quota were sold at official prices while products over the quota were sold at market prices. To determine the welfare aspects of MQ, a number of criteria were analyzed included total industry output, average price, buyers' and producers' surplus.

Prices in colonial India fluctuated much more either than in post-independence India or in the contemporary world. Being an agrarian economy without explicit stabilization policies, a feature India shared with other colonial economies, currency growth was sensitive to trade fluctuations, and real incomes to harvest size. This article generalizes that price movements in India between 1900 and 1935 can be explained by trade and harvest shocks, though the relative importance of each changed over time; that these shocks induced changes in trade and the money multiplier which could be stabilizing; and that resulting changes in real balances can explain major industrial fluctuations.

This paper proposes a theory of supply shocks, or shifts in the short-run Phillips curve, based on relative-price changes and frictions in nominal price adjustment. When price adjustment is costly, firms adjust to large shocks but not to small shocks, and so large shocks have disproportionate effects on the price level. Therefore, aggregate inflation depends on the distribution of relative-price changes: inflation rises when the distribution is skewed to the right, and falls when the distribution is skewed to the left. We show that this theoretical result explains a large fraction of movements in postwar U. S. inflation. Moreover, our model suggests measures of supply shocks that perform better than traditional measures, such as the relative prices of food and energy., I. INTRODUCTION What determines the rate of inflation? Most macroeconomists agree that, in the long run, the primary determinant of inflation is growth in the money supply. The short-run behavior [...]

Firms can be prevented from altering their prices following a shock to aggregate demand due to fixed costs involved in price adjustment. Changes in wage levels can affect correlations between nominal and real gross domestic product. Fixed wages and efficiency wages mean small losses in profits when price remain stable. Wages set by market levels or through monopolistic power may give rise to some firms adjusting prices and other firms not doing so, and large profit losses.

The relationship between the approaches used in measuring house-price indices and economic determinants of house prices at the local level are examined. To address contemporaneous correlation among disturbance terms, an extension of the non-nested tests set forth by Davidson and MacKinnon (1981) and Green (1989) is performed. A new X2 for assessing the differences in the functional relationships between alternative house-price indices and economic variables is also introduced. For the study, the repeat sales method and the assessed value method are used. Although there is a high correlation between the yearly rates of change in the two prices indices, percentage changes differ significantly over periods of two to 10 quarters. Expected inflation and unemployment are found to minimize house price changes, proving their role as house-price determinants. These variables were found to have applicability as forecasting tools, thereby contradicting the efficient market hypothesis.

The existence of equilibria with infinitely many goods is analyzed. It is demonstrated that, when limited to the set of feasible allocations, an economically meaningful equilibrium price will always exist. The study seeks to develop a more general theorem of existence of equilibriam that is relevant to certain cases, including those that are important for finance applications and the space of measures with the norm topology which apply to monopolistic competition.

This paper presents results that indicate that oil price shocks were economically important in explaining movements in industrial production, and, to a lesser degree, movements in wholesale prices in the period between World Wars I and II. The framework for analysis is a vector autoregressive model estimated using monthly data over 1924:2-38:6 that employs a financial intermediation variable, a measure of relative oil prices, and other variables typically found in small macroeconomic models. The impact of oil price shocks is evaluated through computation of variance decompositions and an historical decomposition over the 1929:9-38:6 period., I. INTRODUCTION Post-World War II experience demonstrates that disturbances to aggregate supply are important determinants of aggregate economic performance. A casual glance at the post-1970 data strongly suggests a correlation [...]

The effects of monetary disturbances differ across sectors when some prices can adjust more rapidly than others. In a model economy with two sectors possessing different speeds of price adjustment, monetary shocks generate inverse movements of real interest rates, alter relative prices, and generate sectoral reallocations of labor. Factors such as the willingness of households to substitute goods across sectors and over time affect the economy's response.

A study used micro-level data on various sellers' prices for identical goods to determine whether inflation and price dispersion have a negative correlation. Results indicate an inverse relationship between inflation and price dispersion. Unexpected inflation is followed by declines in price dispersion while expected inflation increases price dispersion.

The consumer's surplus per day of use for a given change in the price of recreational site is the difference in price and as such, it is a constant and is not affected by the actual number of days of use. With regard to a site's characteristics, the surplus per day of use is not generally a constant. Multiplying the constant compensating variation per day of use by the number of days at the site in the original state bounds the compensating variation.

Potential causes for the investment collapse experienced by Mexico during the early 1980s were examined using data from a sector-level investment survey conducted between 1981 and 1985. Results gave little support to the role of debt-overhang or uncertainty effects. Instead, evidence was obtained supporting the possible roles of factors underemphasized by previous studies. These include the increase in the relative prices of investment goods, mainly machinery caused by declining oil prices worldwide, the drop in Mexico's international terms of trade and and the reversal of net capital inflows to Mexico.

The association between the national price level (PL) and nontradables price (P) can be used to derive various purchasing power parity (PPP) indices. PPP is defined as an index of the prices of exportables, importables and nontraded goods. It was posited that a methodology using simultaneous equations computing for the relative prices of nontradables will result in a dependent variable which will provide an alternative econometric analysis of PL.

Empirical research on consumer behavior in relation to unanticipated price changes support the existence of price rigidity. Consumers faced with such changes have to make costly reoptimization investments which manifest in kinked demand curves. Analysis reveals that demand is inelastic in so far as the current price neighborhood is concerned. The size, relative infrequency and upward tendency of nominal price changes is also examined during periods of inflation.

The behavior of asset and currency prices in an exchange economy with transaction costs is examined. The effects of monetary shocks differ with the cash-in-advance approach where there are no real effects. Nominal shocks in the transaction costs model have real consequences in terms of output lost due to transacting. Monetary benefits are derived from the use of currency through the reduction in transaction costs.