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Stable price level and changing prices

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Author Info

  • Antti Suvanto

    (Bank of Finland)

  • Juhana Hukkinen

    (Bank of Finland)

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    Abstract

    The paper investigates the relationship between relative price movements and changes in the aggregate price level using monthly data on Finland’s Consumer Price Index and its components from the period covering the past eight and a half years. This was a period of very low inflation. The rate of growth in the aggregate price level was occasionally very close to zero. The paper shows that declining nominal prices were a rather common phenomenon during this period of low or no inflation. The declining prices cannot, however, be explained by lack of demand or any generalized deflationary tendencies. Hence, the downward rigidity of nominal prices has not prevented relative price adjustments under price stability. The paper develops a new method for looking at the composition of inflation and illustrating how relative price dynamics interact with changes in the aggregate price level. The correlation of relative price variability and aggregate inflation has been negligible, but the correlation between the skewness of price change distribution and aggregate inflation is high. This is in accordance with the predictions of the menu cost models. A significant proportion of the relative price changes appear to have been persistent, suggesting the dominance of productivity and other supply shocks.

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    File URL: http://128.118.178.162/eps/mac/papers/0508/0508034.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Macroeconomics with number 0508034.

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    Length: 35 pages
    Date of creation: 31 Aug 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpma:0508034

    Note: Type of Document - pdf; pages: 35. Bank of Finland Discussion Papers 28/2004
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    Web page: http://128.118.178.162

    Related research

    Keywords: price level; inflation; deflation; prices; business cycles;

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    References

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    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.:
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    1. Herrendorf, Berthold & Teixeira, Arilton, 2003. "Monopoly Rights can Reduce Income Big Time," CEPR Discussion Papers 3854, C.E.P.R. Discussion Papers.
    2. Berger, Allen N. & Hasan, Iftekhar & Klapper, Leora F., 2004. "Further evidence on the link between finance and growth: An international analysis of community banking and economic performance," Research Discussion Papers 8/2004, Bank of Finland.
    3. Bagella, Michele & Becchetti, Leonardo & Hasan, Iftekhar, 2004. "The anticipated and concurring effects of the EMU: exchange rate volatility, institutions and growth," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 1053-1080.
    4. David G. Mayes, 2004. "An approach to bank insolvency in transition and emerging economies," Finance 0404015, EconWPA.
    5. Castrén, Olli & Takalo , Tuomas & Wood , Geoffrey, 2004. "Labour market reform and the sustainability of exchange rate pegs," Research Discussion Papers 22/2004, Bank of Finland.
    6. Kauppi , Heikki & Koskela , Erkki & Stenbacka , Rune, 2004. "Equilibrium unemployment and investment under product and labour market imperfections," Research Discussion Papers 11/2004, Bank of Finland.
    7. Paloviita , Maritta, 2002. "Inflation dynamics in the euro area and the role of expectations," Research Discussion Papers 20/2002, Bank of Finland.
    8. Mayes , David G. & Virén , Matti, 2004. "Asymmetries in the Euro area economy," Research Discussion Papers 9/2004, Bank of Finland.
    9. Jokivuolle , Esa & Lanne , Markku, 2004. "Trading Nokia: The roles of the Helsinki vs the New York stock exchanges," Research Discussion Papers 26/2004, Bank of Finland.
    10. Eran Guse, 2004. "Expectational Business Cycles," Money Macro and Finance (MMF) Research Group Conference 2004 97, Money Macro and Finance Research Group.
    11. Hyytinen, Ari & Takalo, Tuomas, 2004. "Multihoming in the Market for Payment Media: Evidence from Young Finnish Consumers," Discussion Papers 893, The Research Institute of the Finnish Economy.
    12. Koskela , Erkki & Uusitalo , Roope, 2004. "Unintended convergence – how Finnish unemployment reached the European level," Research Discussion Papers 6/2004, Bank of Finland.
    13. Schaling , Eric & Eijffinger , Sylvester & Tesfaselassie , Mewael, 2004. "Heterogeneous information about the term structure, least-squares learning and optimal rules for inflation targeting," Research Discussion Papers 23/2004, Bank of Finland.
    14. Paloviita , Maritta & Mayes , David, 2004. "The use of real time information in Phillips curve relationships for the euro area," Research Discussion Papers 16/2004, Bank of Finland.
    15. Ellison, Martin & Sarno, Lucio & Vilmunen, Jouko, 2004. "Monetary policy and learning in an open economy," Research Discussion Papers 3/2004, Bank of Finland.
    16. Rautureau, Nicolas, 2004. "Measuring the long-term perception of monetary policy and the term structure," Research Discussion Papers 12/2004, Bank of Finland.
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