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Supply shocks and the distribution of price changes

  • Nathan S. Balke
  • Mark A. Wynne

Since the early 1970s, economists have gained an increased appreciation for the importance of supply shocks as sources of fluctuations in aggregate economic activity. Yet the question of how best to measure such shocks remains open. Traditionally, economists have assessed the importance of such shocks by looking at such things as the relative prices of oil or agricultural commodities. Recently, however, it has been suggested that changes in the distribution of price changes for individual commodities may, in fact, be a superior indicator of changes in aggregate supply conditions. In this article, Nathan Balke and Mark Wynne assess this argument in the context of a very simple but well-known model of the aggregate economy. They show that fluctuations in the rate of technological progress across sectors are indeed reflected in the cross-section distribution of prices, lending support to the idea that this may be a superior measure of supply shocks. However, Balke and Wynne raise questions about the interpretation of the relationship between changes in the distribution of price changes for individual commodities and aggregate inflation as evidence of price stickiness.

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Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

Volume (Year): (1996)
Issue (Month): Q I ()
Pages: 10-18

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Handle: RePEc:fip:fedder:y:1996:i:qi:p:10-18
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  1. Laurence Ball & N. Gregory Mankiw, 1993. "Relative-price changes as aggregate supply shocks," Working Papers 93-13, Federal Reserve Bank of Philadelphia.
  2. Bénassy, Jean-Pascal, 1993. "Money and wage contracts in an optimizing model of the business cycle," CEPREMAP Working Papers (Couverture Orange) 9325, CEPREMAP.
  3. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  4. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
  5. Lee E. Ohanian & Alan C. Stockman & Lutz Kilian, 1994. "The effects of real and monetary shocks in a business cycle model with some sticky prices," Proceedings, Federal Reserve Bank of Cleveland, pages 1209-1240.
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