Degree Of Price Rigidity Research Articles

Inflation dynamics: a traditional perspective

Abstract We derive a traditional Phillips curve (TPC) under the assumption that a fraction of firms sells output at optimal prices, while the other fraction sells at contract prices. Our derivation delivers a pricing mechanism where inflation depends on expected inflation and the real optimal price, which is the real marginal cost. The parameters of this Phillips curve have a clear structural interpretation in much the same way as its new Keynesian counterpart.. Using a Leontief-type technology, our baseline TPC features expected inflation, the labour share, demand pressure and a vector of supply shocks. We estimate this TPC for five developed and five emerging market economies and find that the degree of price rigidity is significant and correctly signed in most of the economies. We conclude that this TPC is a credible rival to its forward-looking new Keynesian counterpart.

Determinants of Price Rigidity and Flexibility: Some Survey Evidence for the Pakistan.

The objective of the study is to estimate the determinants of price stickiness or flexibility. Data is collected through structured questionnaire from 342 firms, which are selected through stratified random sampling technique from the Industrial Estate of Khyber Pakhtunkhwa. To estimate the determinants of price flexibility/rigidity, models are estimated through ordinary least squares technique and binary logistic technique. The most important factors for price stickiness are implicit/explicit price contracts and minimum price volatility. Imperfect competitive market structure, number of regular customers, backward-looking behavior, and credibility of central bank and size of the firm are important determinants of price rigidity. While economic literacy and information set regarding expected inflation make the prices flexible. Study recommend that monetary policy of Pakistan should use other transmission channels of money supply instead of traditional channel, because it is found that the degree of price rigidity is low in Pakistan. Keywords: Price Rigidity, Price Flexibility, Price Contract, Frequency of Price Change.

Some Preliminary Evidence of Price Setting Behaviour From the Industrial Estates of Khyber Pakhtunkhwa

Price setting behaviour is a crucial issue for the knowledge of monetary policy transmission mechanism. The objective of the study is to analyze the relationship between firm’s characteristics and the price setting behaviour of firms, using survey-based data. The survey is conducted in the year 2017 in four major industrial estates of Khyber Pakhtunkhwa, namely, Hayatabad, Nowshera, Gadoon and Hattar Industrial Estates. A sample of 342 firms is selected through stratified random sampling and respondents are the managers of the firms. According to results the price elasticity of demand will be inelastic and the number of time to change price decreases in case of less competitors. If the firm is engaged in a contract, then there are more chances that the firms have only regular customers and imperfect competitive market structure. Firms which are involved in input price contracts, they are also involved in output price contracts, so nominal wage rigidity leads to output price rigidity. This paper find that traditional channel of monetary policy is weak as degree of price rigidity is low. Therefore, it is important for monetary policy of Pakistan to focus on other channels of monetary transmission mechanism.

New Keynesian Phillips Curve with time-varying parameters

I generalize the New Keynesian Phillips Curve model of Gali and Gertler (J Monet Econ 44:195–222, 1999) to allow for time-varying parameters. The parameter of interest measures the trade-off between inflation and real economic activity, and it is particularly a nonlinear function of three underlying structural parameters: the discount factor, the degree of price rigidity and the strength of backward-looking behavior or information diffusion. The empirical results show that the estimated parameter of output-inflation trade-off is time varying and is larger in high inflation periods. Specifically, the time-variation of the trade-off between inflation and economic activity stems from the degree of price rigidity, which is negatively correlated with inflation. Moreover, the forward-looking price-setting behavior plays a dominant role in explaining inflation dynamics for most part of the sample period.

Optimal Inflation Weights in the Euro Area

This study investigates the appropriate measure of inflation in the euro area that the central bank should adopt in order to minimize social welfare losses stemming from volatility in the output gap, inflation and relative prices. We use a model that accounts for both the heterogeneity observed in the degree of price rigidity across regions and sectors, and the asymmetry of real disturbances in relative prices. Our work shows that the optimal weights to assign to each region or economic sector depend on complex interactions between the degree of price stickiness, a country’s economic size and the distribution of shocks across regions. Moreover, the optimal system of weights is primarily affected by the distribution of real shocks across countries. It follows that there is no simple rule of thumb for establishing the optimal weights for each region or economic sector.

Reallocation shocks, persistence and nominal rigidities

We reconsider the role of reallocation shocks in a simple New Keynesian model with search and matching frictions. The sign of the conditional correlation between unemployment and vacancies depends on the degree of price rigidity and on the persistence of the shock. Therefore, a non negligible role for reallocation shocks in driving business cycle fluctuations cannot be ruled out on theoretical grounds.

Competition and Price Stickiness: Evidence from the French Retail Gasoline Market

Using daily price quotes from about 10,000 French gas stations, this paper empirically analyses whether the level of competition determines the degree of price stickiness on the retail gasoline market. The degree of price rigidity is measured by the frequency of price changes as well as the average duration of uncensored price spells, while the distance to the nearest station and the number of gas stations within a given radius are considered as proxies for local competition. The results confirm that local competition is an important determinant of the price-setting behavior of gas stations. Indeed, for both measures of price stickiness, we find that the degree of price rigidity is positively related to the distance to the nearest station, and negatively related to the concentration of firms in a given geographical area. This result can be notably explained by the fact that gas stations facing a high competitive pressure are more likely to adjust their prices more quickly and more frequently in response to crude oil price decreases than stations enjoying market power.

Discussion

Discussion

Reconsidering the Relationship between Inflation and Relative Price Variability

It has long been popularly believed that the relationship between inflation and relative price variability (RPV) is positive and stable. Using disaggregated CPI data for the United States and Japan, however, this study finds that the relationship is neither linear nor stable over time. The overall relationship is approximately U‐shaped around a nonzero threshold inflation rate. RPV therefore changes not with the inflation rate per se, but with the deviation of inflation from the threshold inflation rate. More importantly, the relationship is by no means stable over time but instead varies significantly in a way that coincides with regime changes of inflation or monetary policy. The relationship was positive during the period of high inflation of the 1970s and the early 1980s, as has been documented by a number of previous studies, whereas it takes a U‐shape profile during the Great Moderation. The results are robust to the use of core inflation, which excludes the traditionally volatile prices of food and energy. This paper then presents a modified version of the Calvo‐type sticky price model to describe the observed empirical regularities. Simulation experiments show that the modified Calvo model fits the data well, and that the underlying relationship hinges upon the degree of price rigidity, which is systematically related to inflation regime. For countries and periods with low inflation rates, the relationship takes a U‐shape as price adjustment is more sticky. In a high‐inflation environment, when price setting becomes more flexible, the U‐shaped profile vanishes.

Reconsidering the Relationship Between Inflation and Relative Price Variability

The relationship between inflation and relative price variability (RPV) is widely believed to be positive and stable. Using disaggregated CPI data for the U.S. and Japan, however, this study finds that the relationship is neither linear nor stable over time. The overall relationship is approximately U-shaped and symmetric around a certain threshold: a positive correlation on one side but a trade-off relation on the other. More importantly, the relationship is by no means stable over time but varies significantly in a way that coincides with regime changes of inflation or monetary policy. It was positive in the high inflation environment of the 1970s and the early 1980s as often reported by numerous earlier studies, but changes to U-shape after the great moderation period under a low and stable inflation environment. The results are robust to the use of core inflation that precludes the traditionally volatile prices of food and energy. This paper then presents a simple version of the Calvo-type sticky price model to describe the observed empirical characteristics within a setting of sectoral heterogeneity. According to my simulation results, the nature of the relationship hinges upon the degree of price rigidity such that it is close to U-shape if firms adjust prices more slowly, whereas the U-shape disappears when firms adjust prices more frequently.

The long-run output-inflation trade-off with menu costs

We examine the long-run output-inflation trade-off under the assumption that firms face menu costs and set prices in a state dependent fashion. We argue that these characteristics capture the idea that the long-run output-inflation trade-off is driven by (predictable) trend inflation, and the degree of price rigidity should be chosen optimally by firms in the long run, at least on average. We find that state dependent pricing implies a non-trivial departure from long-run monetary neutrality in terms of output, and a larger one in terms of utility. This is because trend inflation substantially influences average mark-ups and relative price distortions. We find that price stability is optimal.

Interest rate rules, inflation and the Taylor principle: an analytical exploration

The purpose of this article is to characterize optimal interest rate rules in the framework of a dynamic stochastic general equilibrium model, and notably to scrutinize the “Taylor principle”, according to which the nominal interest rate should respond more than one for one to inflation. This model yields explicit solutions for the optimal rule. We find that the elasticity of response depends on numerous factors, such as the degree of price rigidity, the autocorrelation of the underlying shocks, or which measure of inflation is used. In general the optimal elasticity of the interest rate with respect to inflation needs not be greater than one.

The Long-run Output-inlation Trade-off with Menu Costs

We examine the long-run output-inflation trade-off under the assumption that firms face menu costs and set prices in a state dependent fashion. We argue that these characteristics capture the idea that the long-run output-inflation trade-off is driven by (predictable) trend inflation, and the degree of price rigidity should be chosen optimally by firms in the long run, at least on average. We find that state dependent pricing implies a non-trivial departure from long-run monetary neutrality in terms of output, and a larger one in terms of utility. This is because trend inflation substantially influences average mark-ups and relative price distortions. We find that price stability is optimal.

Output, Inflation and the New Keynesian Phillips Curve

Explicit modelling of factor markets clarifies two fundamental aspects of the New Keynesian Phillips Curve (NKPC). First, we clarify the relationship between output and marginal cost. Second, for the NKPC in inflation–output space, we identify the key stochastic influences on inflation without recourse to ad hoc cost or excess demand shocks. The econometric implementation of this clarified NKPC, which evolves strictly according news on the stream of future marginal costs, allows us jointly to derive inflation as a forecast of future variables. Our approach clarifies the empirical successes and failures of the NKPC and allows us to provide new aggregate evidence on the degree of price rigidity in the UK economy.

Price Flexibility as a Two‐dimensional Concept and the Volatility of Output

The stabilizing effect of increased price flexibility has been challenged in a series of articles. We show that it is important to distinguish between two different dimensions of flexibility. An increase in the responsiveness of the price level with respect to excess demand may both stabilize and destabilize the economy depending on whether the price level reacts with a lag or whether prices adjust immediately. Hence, the degree of price rigidity in the sense of a delayed price reaction turns out to be of crucial importance for the consequences of an increase in the responsiveness of the price level.

Les dépenses publiques et leur mode de financement en économie ouverte avec changes flexibles: Efficacité et stabilité de l'économie

In that article, a dynamic model for an open economy with flexible exchange rates is developed and used to study the efficiency of an increase in public expenditures in the long run, according to the way it is financed, as was as its long term effect on prices. The stability of the economy in the different cases is also analysed in relation with the sensitivity of investment with respect to interest rates and to the degree of price rigidity.