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Asymmetric Price Adjustment and Economic Fluctuations

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  • Laurence Ball
  • N. Gregory Mankiw

Abstract

This paper considers a possible explanation for asymmetric adjustment of nominal prices. We present a menu-cost model in which positive trend inflation causes firms' relative prices to decline automatically between price adjustments. In this environment, shocks that raise firms' desired prices trigger larger price responses than shocks that lower desired prices. We use this model of asymmetric adjustment to address three issues in macroeconomics: the effects of aggregate demand, the effects of sectoral shocks, and the optimal rate of inflation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4089.

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Date of creation: May 1994
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Handle: RePEc:nbr:nberwo:4089

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  1. Daniel E. Sichel, 1989. "Business cycle asymmetry: a deeper look," Working Paper Series / Economic Activity Section 93, Board of Governors of the Federal Reserve System (U.S.).
  2. repec:fth:harver:1418 is not listed on IDEAS
  3. 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.
  4. Laurence Ball & N. Gregory Mankiw, 1995. "Relative-Price Changes as Aggregate Supply Shocks," NBER Working Papers 4168, National Bureau of Economic Research, Inc.
  5. J. Bradford De Long & Lawrence H. Summers, . "How Does Macroeconomic Policy Matter?," J. Bradford De Long's Working Papers _130, University of California at Berkeley, Economics Department.
  6. J. Bradford DeLong & Lawrence H. Summers, 1988. "How Does Macroeconomic Policy Affect Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 433-494.
  7. Tsiddon, Daniel, 1991. "On the Stubbornness of Sticky Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 69-75, February.
  8. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 287-303, June.
  9. Ball, Laurence & Romer, David, 1989. "The Equilibrium and Optimal Timing of Price Changes," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 179-98, April.
  10. Kimball, Miles S., 1989. "The effect of demand uncertainty on a precommitted monopoly price," Economics Letters, Elsevier, vol. 30(1), pages 1-5.
  11. Cover, James Peery, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1261-82, November.
  12. 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.
  13. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
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