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Supply shocks and the distribution of price changes

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  • Nathan S. Balke
  • Mark A. Wynne

Abstract

Since the early 1970s, economists have gained an increased appreciation for the importance of supply shocks as sources of fluctuations in aggregate economic activity. Yet the question of how best to measure such shocks remains open. Traditionally, economists have assessed the importance of such shocks by looking at such things as the relative prices of oil or agricultural commodities. Recently, however, it has been suggested that changes in the distribution of price changes for individual commodities may, in fact, be a superior indicator of changes in aggregate supply conditions. In this article, Nathan Balke and Mark Wynne assess this argument in the context of a very simple but well-known model of the aggregate economy. They show that fluctuations in the rate of technological progress across sectors are indeed reflected in the cross-section distribution of prices, lending support to the idea that this may be a superior measure of supply shocks. However, Balke and Wynne raise questions about the interpretation of the relationship between changes in the distribution of price changes for individual commodities and aggregate inflation as evidence of price stickiness.

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Bibliographic Info

Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1996)
Issue (Month): Q I ()
Pages: 10-18

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Handle: RePEc:fip:fedder:y:1996:i:qi:p:10-18

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Keywords: Prices ; Supply and demand;

References

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  1. Laurence Ball & N. Gregory Mankiw, 1992. "Relative-Price Changes as Aggregate Supply Shocks," NBER Working Papers 4168, National Bureau of Economic Research, Inc.
  2. Bénassy, Jean-Pascal, 1993. "Money and wage contracts in an optimizing model of the business cycle," CEPREMAP Working Papers (Couverture Orange) 9325, CEPREMAP.
  3. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  4. Ohanian, Lee E & Stockman, Alan C & Kilian, Lutz, 1995. "The Effects of Real and Monetary Shocks in a Business Cycle Model with Some Sticky Prices," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(4), pages 1209-34, November.
  5. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 39-69, February.
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Cited by:
  1. Meyler, Aidan, 1999. "A Statistical Measure Of Core Inflation," Research Technical Papers 2/RT/99, Central Bank of Ireland.
  2. Ratfai, Attila, 2000. "Relative price skewness and inflation: a structural VAR framework," Discussion Paper Series In Economics And Econometrics 0028, Economics Division, School of Social Sciences, University of Southampton.
  3. Attila Rátfai, 2001. "Relative Price Skewness and Inflation: A Structural VAR Framework," IEHAS Discussion Papers 0103, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  4. Mick Silver, 2006. "Core Inflation Measures and Statistical Issues in Choosing Among them," IMF Working Papers 06/97, International Monetary Fund.
  5. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Working Papers, Bank of Canada 06-10, Bank of Canada.
  6. Scott Roger, 1997. "A robust measure of core inflation in New Zealand, 1949-96," Reserve Bank of New Zealand Discussion Paper Series G97/7, Reserve Bank of New Zealand.
  7. Randal J. Verbrugge, 1998. "Cross-Sectional and Longitudinal Inflation Asymmetries," Macroeconomics, EconWPA 9809018, EconWPA.
  8. Randal J. Verbrugge, 1998. "A cross-country investigation of macroeconomic asymmetries," Macroeconomics, EconWPA 9809017, EconWPA, revised 30 Sep 1998.
  9. David Demery & Nigel W. Duck, 2005. "Relative Prices as Aggregate Supply Shocks with Trend Inflation," Bristol Economics Discussion Papers 05/570, Department of Economics, University of Bristol, UK.

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