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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
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    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 destabilizing 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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    Bibliographic Info

    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. repec:nbr:nberre:0126 is not listed on IDEAS
    2. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 387, Cowles Foundation for Research in Economics, Yale University.
    3. Stanley Fischer & Franco Modigliani, 1978. "Towards an understanding of the real effects and costs of inflation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 114(4), pages 810-833, December.
    4. Frederic S. Mishkin, 1981. "The Real Interest Rate: An Empirical Investigation," NBER Working Papers 0622, National Bureau of Economic Research, Inc.
    5. 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.
    6. Driskill, Robert A & Sheffrin, Steven M, 1986. "Is Price Flexibility Destabilizing?," American Economic Review, American Economic Association, American Economic Association, vol. 76(4), pages 802-07, September.
    7. Victor Zarnowitz & Geoffrey H. Moore, 1986. "Major Changes in Cyclical Behavior," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 519-582 National Bureau of Economic Research, Inc.
    8. J. Bradford De Long & Lawrence H. Summers, 1984. "The Changing Cyclical Variability of Economic Activity in the United States," NBER Working Papers 1450, National Bureau of Economic Research, Inc.
    9. Carlton, Dennis W, 1986. "The Rigidity of Prices," American Economic Review, American Economic Association, American Economic Association, vol. 76(4), pages 637-58, September.
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    11. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
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    17. Jorgenson, Dale W, 1971. "Econometric Studies of Investment Behavior: A Survey," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 9(4), pages 1111-47, December.
    18. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
    19. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 451-72, June.
    20. Caskey, John & Fazzari, Steven M, 1987. "Aggregate Demand Contractions with Nominal Debt Commitments: Is Wage Flexibility Stabilizing?," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 25(4), pages 583-97, October.
    21. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(4), pages 666-89, August.
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