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A Semi-Classical Model of Price Level Adjustment

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  • Bennett T. McCallum

Abstract

This paper investigates the theoretical and empirical properties of a model of aggregate supply behavior that was introduced in the 1970s but has received inadequate attention. The model postulates that price changes occur so as to gradually eliminate discrepancies between actual and market-clearing values and to reflect expected changes in market-clearing values. Its implications are more 'classical' than most alternative formulations that reflect gradual price adjustment. Empirical results, which utilize a proxy for market-clearing output that is a function of fixed capital and the real price of oil, are moderately encouraging but not entirely supportive.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4706.

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Date of creation: Apr 1994
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Publication status: published as Carnegie-Rochester Conference Series on Public Policy, vol. 41, pp. 251-284 December 1994
Handle: RePEc:nbr:nberwo:4706

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  1. McCallum, Bennett T, 1980. "Rational Expectations and Macroeconomic Stabilization Policy: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 12(4), pages 716-46, November.
  2. Mussa, Michael, 1981. "Sticky Prices and Disequilibrium Adjustment in a Rational Model of the Inflationary Process," American Economic Review, American Economic Association, American Economic Association, vol. 71(5), pages 1020-27, December.
  3. Robert P. Flood & Robert J. Hodrick, 1983. "Optimal Price and Inventory Adjustment in an Open-Economy Model of the Business Cycle," NBER Working Papers 1089, National Bureau of Economic Research, Inc.
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