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Cost and Price Movements in Business Cycle Theories and Experience: Causes and Effects of OBserved Changes (SEE ALSO WP3131-Send out together)

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Victor Zarnowitz
Abstract

This paper is a sequel to Working Paper No. 3131, "Hypotheses of Sticky Wages and Prices". My first objective is to re-examine the historical record of prices and wages. What changes in their behavior are indicated by the data and how can they be explained? Next, the models that imply that price flexibility may be destabilizing are identified and assessed. This requires in particular an analysis of the role of changes in interest rates and price expectations. Money wages and prices in general had a predominantly pro cyclical pattern of movement before World War II, at least during the major fluctuations, but no declines in the more recent business contractions. Real wages never conformed closely to business cycles but most of their weak reactions were procyclical. Depending on the underlying condition and sources of the shifts in the economy, the departures from flexibility mayor may not be destabilizing. The main contrast, though, is between the stabilizing potential of flexible relative prices and the dectabilizing potential of major general price movements. Major deflations of the past had strong and adverse expectational and distributional effects. So had the recent inflation as it accelerated and grew increasingly volatile. But moderate fluctuations in the price level or the rate of inflation are not necessarily detrimental to the growth in real economic activity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3132.

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Date of creation: Oct 1989
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Handle: RePEc:nbr:nberwo:3132

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  1. John B. Taylor, 1980. "Aggregate Dynamics and Staggered Contracts," NBER Reprints 0126, National Bureau of Economic Research, Inc.
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  2. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers 387, Cowles Foundation, Yale University. [Downloadable!]
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  3. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May. [Downloadable!] (restricted)
  4. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-72, June. [Downloadable!] (restricted)
  5. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June. [Downloadable!] (restricted)
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  6. Jorgenson, Dale W, 1971. "Econometric Studies of Investment Behavior: A Survey," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1111-47, December. [Downloadable!] (restricted)
  7. J. Bradford De Long & Lawrence H. Summers, 1986. "The Changing Cyclical Variability of Economic Activity in the United States," NBER Working Papers 1450, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-89, August. [Downloadable!] (restricted)
  9. Driskill, Robert A & Sheffrin, Steven M, 1986. "Is Price Flexibility Destabilizing?," American Economic Review, American Economic Association, vol. 76(4), pages 802-07, September. [Downloadable!] (restricted)
  10. Stanley Fischer & Franco Modigliani, 1978. "Towards an understanding of the real effects and costs of inflation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 114(4), pages 810-833, December. [Downloadable!] (restricted)
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  11. De Long, James Bradford & Summers, Lawrence H, 1986. "Is Increased Price Flexibility Stabilizing?," American Economic Review, American Economic Association, vol. 76(5), pages 1031-44, December. [Downloadable!] (restricted)
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  12. Caskey, John & Fazzari, Steven M, 1987. "Aggregate Demand Contractions with Nominal Debt Commitments: Is Wage Flexibility Stabilizing?," Economic Inquiry, Oxford University Press, vol. 25(4), pages 583-97, October.
  13. Mishkin, Frederic S., 1981. "The real interest rate: An empirical investigation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 151-200, January. [Downloadable!] (restricted)
  14. Reder, Melvin W, 1988. "The Rise and Fall of Unions: The Public Sector and the Private," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 89-110, Spring. [Downloadable!] (restricted)
  15. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, vol. 76(4), pages 637-58, September. [Downloadable!] (restricted)
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  16. Victor Zarnowitz, 1989. "Facts and Factors in the Recent Evolution of Business Cycles in the United States," NBER Working Papers 2865, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Geary, Patrick T & Kennan, John, 1982. "The Employment-Real Wage Relationship: An International Study," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 854-71, August. [Downloadable!] (restricted)
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