Average Price Level Research Articles

The Asian financial crisis, economic recession, and structural change in Hong Kong

This article studies the interplay of two factors that has an important bearing on the nature of deflationary pressure and its persistence in Hong Kong since 1997. These two main factors are: (1) a sharp and protracted downturn of the business cycle, and (2) structural change of the economy in response to the opening of China and its gradual integration with Hong Kong. We develop a theoretical framework for interpreting the post-1997 deflation that can also be applied to the understanding of the decade of inflation that preceded the onset of the Asian Financial Crisis and the subsequent global economic slowdown. We cite evidence that demonstrates the deflation in Hong Kong can be explained, primarily, by cyclical factors. The persistence in deflation should not be interpreted as a result of structural transformation of the Hong Kong economy resulting from closer integration with Mainland China. The price convergence process resulting from the economic integration with the Mainland will continue for a considerable period of time. It will, however, exert only a minor dampening effect on the average price level in Hong Kong given its slow moving process.

National or International Inflation Targeting? The Wicksellian Dilemma of the Euro-outs

Inflation targeting is the monetary strategy of all EU member states; whether in the euro area, the two euro-outs, Sweden and the United Kingdom. The latter are now faced with two alternatives to achieve price stability: either remain outside the euro area or join it as full-fledged members. This paper examines this policy choice starting from the views of Knut Wicksell, who considered it in his 1920s analysis of an international monetary system based on price level targeting. Price stability could be achieved either within every country by maintaining flexible exchange rates or jointly on a global scale through a system of fixed exchange rates, that is through a monetary union. To him this was a choice between two ‘evils’: fluctuating price levels in the member states of a global monetary union while the average price level is maintained constant versus fluctuating exchange rates in the absence of a monetary union. To Wicksell, the choice of the proper route towards price stability was less complicated than today because he analysed it solely in monetary terms. The current choice for Sweden and the United Kingdom involves other crucial dimensions, such as the existence of nominal rigidities, and the politics of domestically issued money. Political aspects concerning the euro will be the ultimate determinants of the future monetary path for both countries.

Wages, Prices, the Natural Wage and Income Distribution

In a world of oligopoly and monopolistic competition, prices are essentially set using a markup principle. Real wages are money wages divided by average price level, which depends on average markup level. In the short run, as markups and real wages change when expectations are not correct, income distribution changes. The natural real wage is the real wage at full employment (natural rate of unemployment NAIRU). Even without economic growth the natural real wage, hence income distribution, can change. With economic growth, the natural real wage occurs at: lower rates of unemployment in dynamic societies; higher rates of unemployment in sluggish societies.

Relative prices and investment rates

We construct a panel for the price of aggregate investment over consumption and report the following observations. (1) Relative price differences across countries are large over the entire sample period, and this conclusion is not affected by excluding non-tradable consumption goods. (2) Relative price dispersion has decreased during the sample period. (3) Relative price changes are not persistent across periods, while average price levels are. Moreover, the persistence in relative price levels is higher for countries at low relative prices. We show that the relative price of investment is negatively correlated with investment rates in a cross section of countries. The standard one-sector growth model is a natural framework to study quantitatively the effects of barriers to capital accumulation since there is a very simple mapping between barriers to investment and relative prices in this environment. We simulate a calibrated version of the model, in which barriers follow a stochastic process common to all countries and estimated using relative price data, and obtain statistics for investment rates that closely resemble what we observe in the data. In particular, the model accounts for 90% of the 1985 Gini index of relative investment rates and the decline in investment rate dispersion over time. The model has two limitations as a theory of development. First, it cannot account for the income disparity in the data unless we assume unmeasured capital with barriers affecting the broad measure of capital. Second, even under these extreme assumptions, the model cannot account for the evolution of income disparity over time.

Money and Price Dispersion

We relax restrictions on the storage technology in a prototypical monetary search model to study price dispersion. In this case, buyers and sellers enter matches with potentially different willingness to trade. Across the distribution of possible bilateral matches, prices generally will differ even though agents have identical preferences and technologies. We provide existence conditions for a particularly simple equilibrium pattern of exchange. We prove that in the limiting case where search frictions are eliminated, equilibrium prices are uniform. We also show that a higher initial money stock can raise the average price level and increase price dispersion.

Why the poor pay more: household curative expenditures in rural Sierra Leone.

This paper draws on data from Sierra Leone, and secondary data from elsewhere, to show that the rural poor can be disproportionately disadvantaged by user charges for health care, paying a higher percentage of their incomes for health care than wealthier households. Cost sharing systems at primary care level should include exemptions for the poor, but rarely succeed in consistently protecting them. The regressivity of health expenditures also results from lack of protection from the higher costs of less-frequently used, expensive providers. In Sierra Leone, the burden of curative treatment costs for all groups came mainly from private and NGO providers. Proximity to facilities appeared a more important factor in their use than average price levels. Even if a perfect exemption system existed at government primary care facilities, it would not have had much overall effect because of their relatively small contribution to household health expenditures. The financial burden on households could be relieved by making basic health facilities more accessible and at hospital level using additional resources generated through improved efficiency and cross-subsidization to provide exemptions. Also, pricing policy should take into account local economic conditions. Insurance/prepayment schemes covering the cost of hospitalization would come closer to an ideal solution, but have been implemented in very few of the poorer countries.

Why the poor pay more: household curative expenditures in rural Sierra Leone

This paper draws on data from Sierra Leone, and secondary data from elsewhere, to show that the rural poor can be disproportionately disadvantaged by user charges for health care, paying a higher percentage of their incomes for health care than wealthier households. Cost sharing systems at primary care level should include exemptions for the poor, but rarely succeed in consistently protecting them. The regressivity of health expenditures also results from lack of protection from the higher costs of less-frequently used, expensive providers. In Sierra Leone, the burden of curative treatment costs for all groups came mainly from private and NGO providers. Proximity to facilities appeared a more important factor in their use than average price levels. Even if a perfect exemption system existed at government primary care facilities, it would not have had much overall effect because of their relatively small contribution to household health expenditures. The financial burden on households could be relieved by making basic health facilities more accessible and at hospital level using additional resources generated through improved efficiency and cross-subsidization to provide exemptions. Also, pricing policy should take into account local economic conditions. Insurance/prepayment schemes covering the cost of hospitalization would come closer to an ideal solution, but have been implemented in very few of the poorer countries. Copyright © 1999 John Wiley & Sons, Ltd.

Unanticipated Money Growth and the Business Cycle Reconsidered

The role of unanticipated changes in money growth for aggregate fluctuations is reexamined using the methods of quantitative equilibrium business cycle theory. A stochastic growth model with money is constructed in which production and trade take place in spatially separated markets (islands). Following Robert E. Lucas (1972, 1975), individuals only observe prices in their own local market, causing them to confuse changes in the average price level with changes in market specific relative prices. The authors show that this mechanism can lead to large fluctuations in real economic activity. Some aspects of the statistical properties of these fluctuations, however, differ significantly from those describing U.S. business cycles. Copyright 1997 by Ohio State University Press.

Learning in an Equilibrium Search Model

This paper explores the role of learning in an equilibrium search model with asymmetric information. Firms with identical but privately observed marginal cost sell a homogeneous good to heterogeneously informed consumers. A reservation-price equilibrium exists if the uninformed consumers' search cost is sufficiently large. In this equilibrium, the amount of price dispersion is inversely related to the realization of marginal cost. Also, the average price level is less responsive to cost changes than when cost is observable. Finally, uncertainty about firms' marginal cost increases the expected price level. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Price Discrimination, Competition and Regulation

This paper analyzes some effects of price discrimination policy in a model where a dominant incumbent firm faces an endogenous degree of competition in one of its two markets. Banning price discrimination tends to encourage more entry, which is desirable if the entrant is as efficient as the incumbent but has ambiguous welfare effects more generally. Prices in both markets might fall. Price discrimination policy under different forms of price regulation is also examined. If the incumbent's average price level is regulated, then allowing price discrimination can lead to pricing below marginal cost, with possible anticompetitive consequences.

A model of latent symmetry in cross price elasticities

This paper develops the Latent Symmetric Elasticity Structure (LSES), a market share price elasticity model which allows elasticities to be decomposed into two components: a symmetric substitution index revealing the strength of competition between brand pairs, and a brand-specific coefficient revealing the overall impact of a brand on its competitors. An application of the model to unconstrained cross price elasticities shows that brand-price competition in one market is well-represented by a LSES model in which brand substitutability and elasticity asymmetry are related to average price level.

Financial Control in the Transition from Classical Socialism to a Market Economy

The transition from socialism to capitalism poses severe problems of financial management that have yet to be resolved in principle, let alone in practice. One unfortunate consequence is continual financial turmoil as socialist economies of the Soviet Union and Eastern Europe attempt reform. Inflation, either open or repressed, first accompanies and then undermines attempts to decentralize decision-making. But why should the transition from central planning to a market economy be inflationary? Understanding the system of financial control in the preexisting regime of “classical” socialism is the key to understanding what might go wrong in the transition. I discuss how in a more deliberate transition, domestic tax and monetary arrangements might be managed to keep the average price level stable as the market prices of individual goods and services become free to fluctuate, and suggest complementary policies governing tariffs and foreign exchange convertability in the move toward free foreign trade.

Effects on agricultural supply of producer price level and stability with and without goods scarcity: The case of coffee supply in Madagascar

AbstractThis article examines several hypotheses related to influences on the supply of agricultural export products in developing countries. First, it considers the hypothesis that a scarcity of consumer incentive goods so reduces the elasticity of supply to real prices that it becomes negative. Next, it analyses various effects of real price instability on supply, effects that vary according to the availability of consumer goods. Finally, it considers the indirect influence of stabilization schemes on supply, through their effect on the average level of producer prices. The various hypotheses are then tested for the case of coffee supply in Madagascar during the period 1965‐84.

ESTIMATING SOURCES OF FLUCTUATIONS IN THE AUSTRALIAN WOOL MARKET: AN APPLICATION OF VAR METHODS

Vector autoregression (VAR) methods are used to analyse the contribution of supply, demand and policy shocks to unpredictable fluctuations in the market for Australian wool. VAR procedures are compared with conventional structural econometric models as methods for decomposing sources of instability. While each has advantages and disadvantages, VAR procedures might be viewed as preferable when the underlying market structure is complex and uncertain, as it is in the case of wool. Based on the results obtained, demand shocks are the dominant source of uncertainty in the wool market in the absence of Australian Wool Corporation intervention, but intervention has blunted their effects, reducing market uncertainty and increasing the average level of prices and revenues.

Relative Agricultural Prices and Monetary Policy

AbstractAn imperfect information, rational expectations model of relative price determination is presented. This model provides an econometric specification for testing for a causal relationship between money and the relative prices of agricultural commodities. Test results indicate that variations in the growth rate of the nominal money supply (whether anticipated or unanticipated) have not been an important influence on the average level of prices received by farmers relative to other prices in the economy over the period 1951–85.

Market disequilibria and their influence on small retail store pricing

In this paper a quantitative model is developed to explain differences in average store price levels. We assume that stores may operate under different economic regimes, that is, under excess capacity or excess demand. Prices are expected to the higher than average in case of an excess demand regime and lower in an excess capacity situation. Actual information regarding the regime that applies to each individual store is not available. Therefore, we propose to use a so-called ‘switching model’ with endogenous regime choice to analyse the store price differences. The model developed in the paper is estimated using four largely differing types of stores from the Dutch retail trade. These samples consist mainly of small stores.

Testing a Spatial Interacting-Markets Hypothesis

Two models for competitive spatial pricing between retail outlets in a single urban area are presented. The models are distinguished in terms of first, their relationships to underlying supply and demand conditions in the market and second, the spatial forms of inter-site competition described. Properties of the models are identified. The statistical theory appropriate to these models is reviewed and the models then fitted to data for retail gasoline prices during periods of falling and then rising average price levels.

The development of the USDA estimates of the cost of raising a child

Four issues fundamental to the United States Department of Agriculture (USDA) approach to the development of estimates of the cost of raising a child are identified. The USDA resolution of conceptual and procedural problems is discussed in the context of other approaches to standard budget and child cost research. Finally, the USDA procedures are illustrated by a detailed description of the development of the most recent USDA estimates of the annual and total costs of raising farm children from birth to age eighteen. These estimates, updated to 1980 annual average price levels, are presented.

Effects of Inflation on Financial Markets and Agricultural Lending Institutions

Inflation, one of the most misused words in the English language, is defined here as a continuing rise in the average level of prices for real goods and services. The following price changes thus do not constitute inflation: (a) a price increase for an individual good or service, (b) a once-and-for-all increase in the average level of prices, and (c) a temporary increase in the average level of prices. For example, a price increase for an individual good may affect the average price level. But by itself, this price increase is not inflationary since it is self-limiting; either producers will increase their production and hence drive the price down or else consumers will substitute for other goods in response to the higher price. Inflation of the steady pace variety which can be forecasted with little or no error will have one set of effects on an economy. Inflation of the fits and starts variety which cannot be forecasted with a reasonably low error will have another set of effects. The generalization that inflation transfers wealth from

Nonmonetary Aspects of Inflation

THE INEFFECTIVENESS OF EFFORTS over the last decade to respond to the frustrating problem of inflation has destroyed much of the optimism that surrounded macroeconomic policy in the 1960s. The emergence of stagflation or the simultaneous existence of high levels of unemployment and continuing inflation has been a surprise to a traditional interpretation of inflation as the consequence of excessive aggregate demand. While it has not been difficult to identify the various initiating factors responsible for individual episodes of inflation, the persistence of the problem, long after the reversal of the original initiating forces and in the face of substantial unemployment, has created a problem for both theory and policy. The traditional view of the inflation process, and thus of the appropriate remedies, interprets the economy as an aggregation of individual markets that are competitive. Within these markets, changes in individual prices and wage rates are seen primarily as the reflection of changing conditions of demand and supply. In addition, both demand and supply are believed to respond quickly to changes in the structure of relative prices. Shifts in the composition of resource use can be readily accommodated by price increases in those markets when more resources are required, if they are offset by price declines in markets with reduced demand. In such an economy inflation can be constrained by aggregate demand policies alone. The adjustment of relative prices can occur wlthin a constant average price level as long as the growth in money balances (adjusted for secular trends in velocity) does not exceed the growth in real output. In fact, inflation can be viewed as strictly a