IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpma/0508034.html
   My bibliography  Save this paper

Stable price level and changing prices

Author

Listed:
  • Antti Suvanto

    (Bank of Finland)

  • Juhana Hukkinen

    (Bank of Finland)

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.

Suggested Citation

  • Antti Suvanto & Juhana Hukkinen, 2005. "Stable price level and changing prices," Macroeconomics 0508034, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:0508034
    Note: Type of Document - pdf; pages: 35. Bank of Finland Discussion Papers 28/2004
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0508/0508034.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. repec:zbw:bofrdp:2004_021 is not listed on IDEAS
    2. repec:zbw:bofrdp:2004_012 is not listed on IDEAS
    3. Herrendorf, Berthold & Teixeira, Arilton, 2003. "Monopoly Rights can Reduce Income Big Time," CEPR Discussion Papers 3854, C.E.P.R. Discussion Papers.
    4. 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.
    5. Eran Guse, 2004. "Expectational Business Cycles," Money Macro and Finance (MMF) Research Group Conference 2004 97, Money Macro and Finance Research Group.
    6. repec:zbw:bofrdp:2004_025 is not listed on IDEAS
    7. repec:zbw:bofrdp:2004_004 is not listed on IDEAS
    8. Paloviita, Maritta & Mayes, David, 2005. "The use of real-time information in Phillips-curve relationships for the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 415-434, December.
    9. repec:zbw:bofrdp:2004_022 is not listed on IDEAS
    10. Allen Berger & Iftekhar Hasan & Leora Klapper, 2004. "Further Evidence on the Link between Finance and Growth: An International Analysis of Community Banking and Economic Performance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 25(2), pages 169-202, April.
    11. repec:zbw:bofrdp:2004_018 is not listed on IDEAS
    12. Kauppi, Heikki & Koskela, Erkki & Stenbacka, Rune, 2004. "Equilibrium Unemployment and Investment Under Product and Labour Market Imperfections," IZA Discussion Papers 1058, Institute of Labor Economics (IZA).
    13. repec:zbw:bofrdp:2004_011 is not listed on IDEAS
    14. Maritta Paloviita, 2006. "Inflation Dynamics in the Euro Area and the Role of Expectations," Empirical Economics, Springer, vol. 31(4), pages 847-860, November.
    15. repec:zbw:bofrdp:2004_019 is not listed on IDEAS
    16. David G. Mayes & Matti Virén, 2004. "Asymmetries in the Euro area economy," Macroeconomics 0404024, University Library of Munich, Germany.
    17. 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.
    18. Ellison, Martin & Sarno, Lucio & Vilmunen, Jouko, 2004. "Monetary policy and learning in an open economy," Bank of Finland Research Discussion Papers 3/2004, Bank of Finland.
    19. Mayes, David G., 2004. "An approach to bank insolvency in transition and emerging economies," Bank of Finland Research Discussion Papers 4/2004, Bank of Finland.
    20. Maritta Paloviita, 2004. "Inflation dynamics in the euro area and the role of expectations," Macroeconomics 0405015, University Library of Munich, Germany.
    21. repec:zbw:bofrdp:2004_016 is not listed on IDEAS
    22. repec:zbw:bofrdp:2004_008 is not listed on IDEAS
    23. Takalo, Tuomas & Castrén, Olli & Wood, Geoffrey, 2004. "Labour market reform and the sustainability of exchange rate pegs," Working Paper Series 406, European Central Bank.
    24. repec:zbw:bofrdp:2004_015 is not listed on IDEAS
    25. repec:zbw:bofrdp:2004_001 is not listed on IDEAS
    26. repec:zbw:bofrdp:2004_007 is not listed on IDEAS
    27. repec:zbw:bofrdp:2004_006 is not listed on IDEAS
    28. repec:zbw:bofrdp:2004_002 is not listed on IDEAS
    29. Michele Bagella & Leonardo Becchetti & Iftekhar Hasan, 2004. "The Anticipated and Concurring Effects of the EMU," CEIS Research Paper 55, Tor Vergata University, CEIS.
    30. repec:zbw:bofrdp:2004_024 is not listed on IDEAS
    31. repec:zbw:bofrdp:2004_014 is not listed on IDEAS
    32. Jukka Railavo, 2004. "Stability consequences of fiscal policy rules," Macroeconomics 0404020, University Library of Munich, Germany.
    33. repec:zbw:bofrdp:2004_003 is not listed on IDEAS
    34. repec:zbw:bofrdp:2004_023 is not listed on IDEAS
    35. Lauri Kajanoja, 2004. "Extracting growth and inflation expectations from financial market data," Macroeconomics 0404021, University Library of Munich, Germany.
    36. repec:zbw:bofrdp:2004_026 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Baumgartner, Josef & Glatzer, Ernst & Rumler, Fabio & Stiglbauer, Alfred, 2005. "How frequently do consumer prices change in Austria? Evidence from micro CPI data," Working Paper Series 523, European Central Bank.
    2. KANGASSALO Pertti & TAKALA Kari, 2010. "Measuring the Usefulness of Consumers’ Inflation Expectations in Finland," EcoMod2003 330700076, EcoMod.
    3. Aucremanne, Luc & Dhyne, Emmanuel, 2004. "How frequently do prices change? Evidence based on the micro data underlying the Belgian CPI," Working Paper Series 331, European Central Bank.
    4. Camba-Méndez, Gonzalo & Garcí­a, Juan Angel & Rodriguez-Palenzuela, Diego, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 278, European Central Bank.
    5. Fabiani, Silvia & Gattulli, Angela & Sabbatini, Roberto, 2004. "The pricing behaviour of Italian firms: new survey evidence on price stickiness," Working Paper Series 333, European Central Bank.
    6. Alsamara, Mouyad Kassm & Mrabet, Zouhair & Elafif, Mohamed & Gangopadhyay, Partha, 2017. "The asymmetric effects of oil price on economic growth in Turkey and Saudi Arabia: new evidence from nonlinear ARDL approach," International Journal of Development and Conflict, Gokhale Institute of Politics and Economics, vol. 7(2), pages 97-118.
    7. Rumler Fabio & Stiglbauer Alfred & Baumgartner Josef, 2011. "Patterns and Determinants of Price Changes: Analysing Individual Consumer Prices in Austria," German Economic Review, De Gruyter, vol. 12(3), pages 336-350, August.
    8. Luc Aucremanne & Guy Brys & Peter J Rousseeuw & Anja Struyf & Mia Hubert, 2003. "Inflation, relative prices and nominal rigidities," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 81-105, Bank for International Settlements.
    9. Silvia Fabiani & Angela Gattulli & Roberto Sabbatini, 2003. "La rigidità dei prezzi in Italia," Moneta e Credito, Economia civile, vol. 56(223), pages 325-358.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Leitemo, Kai & Söderström, Ulf, 2008. "Robust Monetary Policy In The New Keynesian Framework," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S1), pages 126-135, April.
    2. Mikko Puhakka, 2005. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Macroeconomics 0508033, University Library of Munich, Germany.
    3. repec:zbw:bofrdp:2004_025 is not listed on IDEAS
    4. 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.
    5. 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.
    6. repec:zbw:bofrdp:2004_026 is not listed on IDEAS
    7. Puhakka, Mikko, 2004. "Equilibrium dynamics under lump-sum taxation in an exchange economy with skewed endowments," Research Discussion Papers 29/2004, Bank of Finland.
    8. repec:zbw:bofrdp:2004_031 is not listed on IDEAS
    9. Suvanto, Antti & Hukkinen, Juhana, 2004. "Stable price level and changing prices," Research Discussion Papers 28/2004, Bank of Finland.
    10. repec:zbw:bofrdp:2004_028 is not listed on IDEAS
    11. Leitemo, Kai & Söderström, Ulf, 2008. "Robust Monetary Policy In The New Keynesian Framework," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S1), pages 126-135, April.
    12. repec:zbw:bofrdp:2004_029 is not listed on IDEAS
    13. repec:zbw:bofrdp:2004_017 is not listed on IDEAS
    14. Mälkönen, Ville, 2004. "The efficiency implications of financial conglomeration," Research Discussion Papers 17/2004, Bank of Finland.
    15. Mälkönen, Ville, 2004. "The efficiency implications of financial conglomeration," Bank of Finland Research Discussion Papers 17/2004, Bank of Finland.
    16. repec:zbw:bofrdp:2004_010 is not listed on IDEAS
    17. repec:zbw:bofrdp:2004_015 is not listed on IDEAS
    18. Paloviita, Maritta & Mayes, David, 2005. "The use of real-time information in Phillips-curve relationships for the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 415-434, December.
    19. Männistö, Hanna-Leena, 2005. "Forecasting with a forward-looking DGE model : combining long-run views of financial markes with macro forecasting," Research Discussion Papers 21/2005, Bank of Finland.
    20. 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.
    21. David G. Mayes & Matti Virén, 2004. "Asymmetries in the Euro area economy," Macroeconomics 0404024, University Library of Munich, Germany.
    22. repec:zbw:bofrdp:2004_016 is not listed on IDEAS
    23. Mälkönen, Ville, 2004. "Capital adequacy regulation and financial conglomerates," Research Discussion Papers 10/2004, Bank of Finland.
    24. repec:zbw:bofrdp:2005_021 is not listed on IDEAS
    25. repec:zbw:bofrdp:2004_009 is not listed on IDEAS
    26. David G. Mayes & Matti Virén, 2004. "Asymmetries in the Euro area economy," Macroeconomics 0404024, University Library of Munich, Germany.
    27. Männistö, Hanna-Leena, 2005. "Forecasting with a forward-looking DGE model: combining long-run views of financial markes with macro forecasting," Bank of Finland Research Discussion Papers 21/2005, Bank of Finland.
    28. Sheedy, Kevin D., 2010. "Intrinsic inflation persistence," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 1049-1061, November.
    29. Juillard, Michael & Kamenik, Ondra & Kumhof, Michael & Laxton, Douglas, 2008. "Optimal price setting and inflation inertia in a rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2584-2621, August.
    30. Ivo J.M. Arnold & Jan J.G. Lemmen, 2008. "Inflation Expectations and Inflation Uncertainty in the Eurozone: Evidence from Survey Data," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 144(2), pages 325-346, July.
    31. Ray Barrell & Sylvia Gottschalk & Dawn Holland & Ehsan Khoman & Iana Liadze & Olga Pomerantz, 2008. "The impact of EMU on growth and employment," European Economy - Economic Papers 2008 - 2015 318, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

    More about this item

    Keywords

    price level; inflation; deflation; prices; business cycles;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:0508034. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: EconWPA (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.