Markup Pricing and Monetary Policy: A Reexamination of the Effectiveness of Monetary Policy under Imperfect Competition
AbstractIf markup ratios fluctuate widely, so does output volume and investment. This magnifies the business cycle and increases uncertainty about future economic conditions. This paper investigates the implication for monetary policy by analyzing markup ratios. The main conclusions are (1) as a result of the failure of Japanese firms to fully adjust their prices to exogenous shocks, markup ratios sometimes greatly deviate from trend lines. (2) According to the menu-cost theorem, the existence of costs associated with price changes prevents firms from changing prices to the level consistent with marginal costs, thus reducing social welfare. In this regard, establishing a money supply rule under which monetary authorities accommodate exogenous shocks provides an incentive for firms to change their prices. (3) Markup pricing magnifies the social welfare cost of inflation. In this argument, monetary authorities have the optimal choice of tightening monetary policy even under low inflation, if they observe that markup ratios have remained high.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.
Volume (Year): 15 (1997)
Issue (Month): 1 (May)
Contact details of provider:
Postal: 2-1-1 Nihonbashi, Hongoku-cho, Chuo-ku, Tokyo 103
Web page: http://www.imes.boj.or.jp/
More information through EDIRC
Find related papers by JEL classification:
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Roberts, John M & Stockton, David J & Struckmeyer, Charles S, 1994. "Evidence on the Flexibility of Prices," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 142-50, February.
- Driffill, John & Mizon, Grayham Ernest & Ulph, Alistair Mitchell, 1989.
"Costs of Inflation,"
CEPR Discussion Papers
293, C.E.P.R. Discussion Papers.
- Fukuda, Shin-Ichi & Teruyama, Hiroshi & Toda, Hiro Y., 1991. "Inflation and price-wage dispersions in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 5(2), pages 160-188, June.
- Hahn, Frank, 1990. "On Inflation," Oxford Review of Economic Policy, Oxford University Press, vol. 6(4), pages 15-25, Winter.
- Haskel, Jonathan & Martin, Christopher & Small, Ian, 1995. "Price, Marginal Cost and the Business Cycle," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(1), pages 25-41, February.
- Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kinken).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.