Markup Pricing and Monetary Policy: A Reexamination of the Effectiveness of Monetary Policy under Imperfect Competition
If markup ratios fluctuate widely, so does output volume and investment. This magnifies the business cycle and increases uncertainty about future economic conditions. This paper investigates the implication for monetary policy by analyzing markup ratios. The main conclusions are (1) as a result of the failure of Japanese firms to fully adjust their prices to exogenous shocks, markup ratios sometimes greatly deviate from trend lines. (2) According to the menu-cost theorem, the existence of costs associated with price changes prevents firms from changing prices to the level consistent with marginal costs, thus reducing social welfare. In this regard, establishing a money supply rule under which monetary authorities accommodate exogenous shocks provides an incentive for firms to change their prices. (3) Markup pricing magnifies the social welfare cost of inflation. In this argument, monetary authorities have the optimal choice of tightening monetary policy even under low inflation, if they observe that markup ratios have remained high.
Volume (Year): 15 (1997)
Issue (Month): 1 (May)
|Contact details of provider:|| Postal: |
Web page: http://www.imes.boj.or.jp/Email:
More information through EDIRC
References listed on IDEAS
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.:
- Roberts, John M & Stockton, David J & Struckmeyer, Charles S, 1994. "Evidence on the Flexibility of Prices," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 142-50, February.
- Hahn, Frank, 1990. "On Inflation," Oxford Review of Economic Policy, Oxford University Press, vol. 6(4), pages 15-25, Winter.
- Driffill, John & Mizon, Grayham Ernest & Ulph, Alistair Mitchell, 1989.
"Costs of Inflation,"
CEPR Discussion Papers
293, C.E.P.R. Discussion Papers.
- Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
- Fukuda, Shin-Ichi & Teruyama, Hiroshi & Toda, Hiro Y., 1991. "Inflation and price-wage dispersions in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 5(2), pages 160-188, June.
- Haskel, Jonathan & Martin, Christopher & Small, Ian, 1995. "Price, Marginal Cost and the Business Cycle," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(1), pages 25-41, February.
When requesting a correction, please mention this item's handle: RePEc:ime:imemes:v:15:y:1997:i:1:p:27-62. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kinken)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.