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Asymmetric Price Adjustment and Economic Fluctuations

  • Ball, Laurence
  • Mankiw, N Gregory

This paper considers a possible explanation for asymmetric adjustment of nominal prices. The authors 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. The authors 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. Copyright 1994 by Royal Economic Society.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 104 (1994)
Issue (Month): 423 (March)
Pages: 247-61

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Handle: RePEc:ecj:econjl:v:104:y:1994:i:423:p:247-61
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  1. 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.
  2. 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.
  3. Kimball, Miles S., 1989. "The effect of demand uncertainty on a precommitted monopoly price," Economics Letters, Elsevier, vol. 30(1), pages 1-5.
  4. Laurence Ball & N. Gregory Mankiw, 1993. "Relative-price changes as aggregate supply shocks," Working Papers 93-13, Federal Reserve Bank of Philadelphia.
  5. Laurence Ball & David Romer, 1987. "The Equilibrium and Optimal Timing of Price Changes," NBER Working Papers 2432, National Bureau of Economic Research, Inc.
  6. Sichel, D.E., 1988. "Business Cycle Asymmetry: A Deeper Look," Papers 85, Princeton, Department of Economics - Financial Research Center.
  7. 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.
  8. 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.
  9. 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.
  10. repec:fth:harver:1418 is not listed on IDEAS
  11. 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.
  12. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 287-303, June.
  13. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
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