Relative-price changes as aggregate supply shocks
AbstractThis 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.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 93-13.
Date of creation: 1993
Date of revision:
Other versions of this item:
- Laurence Ball & N. Gregory Mankiw, 1995. "Relative-Price Changes as Aggregate Supply Shocks," NBER Working Papers 4168, National Bureau of Economic Research, Inc.
- Ball, L. & Mankiw, G.H., 1992. "Relative-Price Change as Aggregate Supply Shocks," Harvard Institute of Economic Research Working Papers 1609, Harvard - Institute of Economic Research.
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
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.:
- Blejer, Mario I, 1983. "On the Anatomy of Inflation: The Variability of Relative Commodity Prices in Argentina," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(4), pages 469-82, November.
- Mankiw, N Gregory, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 529-38, May.
- Batchelor, R. A., 1981. "Aggregate expectations under the stable laws," Journal of Econometrics, Elsevier, vol. 16(2), pages 199-210, June.
- Laurence Ball & N. Gregory Mankiw, 1994.
"Asymmetric Price Adjustment and Economic Fluctuations,"
NBER Working Papers
4089, National Bureau of Economic Research, Inc.
- Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, vol. 104(423), pages 247-61, March.
- Ball, L. & Mankiw, N.G., 1992. "Asymmetric Price Adjustment and Economic Fluctuations," Harvard Institute of Economic Research Working Papers 1602, Harvard - Institute of Economic Research.
- Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
- Vining, Daniel R, Jr & Elwertowski, Thomas C, 1976. "The Relationship between Relative Prices and the General Price Level," American Economic Review, American Economic Association, vol. 66(4), pages 699-708, September.
- Arthur M. Okun, 1975. "Inflation: Its Mechanics and Welfare Costs," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 351-402.
- Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 823-38, Supp..
- Parkin, Michael, 1986. "The Output-Inflation Trade-off When Prices Are Costly to Change," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 200-224, February.
- Mizon, Grayham E & Safford, J Claire & Thomas, Stephen H, 1990. "The Distribution of Consumer Price Changes in the United Kingdom," Economica, London School of Economics and Political Science, vol. 57(226), pages 249-62, May.
- Stanley Fischer, 1981. "Relative Shocks, Relative Price Variability, and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 381-442.
- Caplin, Andrew & Leahy, John, 1991.
"State-Dependent Pricing and the Dynamics of Money and Output,"
The Quarterly Journal of Economics,
MIT Press, vol. 106(3), pages 683-708, August.
- Caplin, A. & Leahy, J., 1989. "State-Dependent Pricing And The Dynamics Of Money And Output," Discussion Papers 1989_32, Columbia University, Department of Economics.
- Caplin, Andrew S & Spulber, Daniel F, 1987.
"Menu Costs and the Neutrality of Money,"
The Quarterly Journal of Economics,
MIT Press, vol. 102(4), pages 703-25, November.
- Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September.
- Marsden, David, 1990. "United Kingdom," Open Access publications from London School of Economics and Political Science http://eprints.lse.ac.uk/, London School of Economics and Political Science.
- Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
- Robert J. Gordon, 1975. "Alternative Responses of Policy to External Supply Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(1), pages 183-206.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Beth Paul).
If references are entirely missing, you can add them using this form.