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Separating Quantity Shock and Quality Innovation in Relative Prices

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  • Nguyen, Thang

Abstract

The study develops a simple general equilibrium model to infer relative quality changes, and applies the method to the US services goods economy in 1946-2005. The general equilibrium framework helps separate quantity and quality e¤ects on the observable relative price and budget share which constitute double manifestation. Empirical results show that US services relative quality is increasing since 1970s, and quantity shock alone cannot fully explain the evolution of services relative price. The latter finding puts forth a warning on the missing of quality changes in some business cycle models.

Suggested Citation

  • Nguyen, Thang, 2005. "Separating Quantity Shock and Quality Innovation in Relative Prices," MPRA Paper 225, University Library of Munich, Germany, revised 07 May 2006.
  • Handle: RePEc:pra:mprapa:225
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    File URL: https://mpra.ub.uni-muenchen.de/788/1/MPRA_paper_788.pdf
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    References listed on IDEAS

    as
    1. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-973, July.
    2. Mark Bils & Peter J. Klenow, 2001. "Quantifying Quality Growth," American Economic Review, American Economic Association, vol. 91(4), pages 1006-1030, September.
    3. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-185, March.
    4. Peter J. Klenow, 2003. "Measuring consumption growth: the impact of new and better products," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 10-23.
    5. Mark Bils & Peter J. Klenow, 2004. "Some Evidence on the Importance of Sticky Prices," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 947-985, October.
    6. Hallak, Juan Carlos, 2006. "Product quality and the direction of trade," Journal of International Economics, Elsevier, vol. 68(1), pages 238-265, January.
    7. Douglas Fisher & Adrian R. Fleissig & Apostolos Serletis, 2006. "An Empirical Comparison of Flexible Demand System Functional Forms," World Scientific Book Chapters,in: Money And The Economy, chapter 13, pages 247-277 World Scientific Publishing Co. Pte. Ltd..
    8. Juan Carlos Hallak & Peter K. Schott, 2011. "Estimating Cross-Country Differences in Product Quality," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 417-474.
    9. Hal R. Varian, 1983. "Non-parametric Tests of Consumer Behaviour," Review of Economic Studies, Oxford University Press, vol. 50(1), pages 99-110.
    10. David Hummels & Peter J. Klenow, 2005. "The Variety and Quality of a Nation's Exports," American Economic Review, American Economic Association, vol. 95(3), pages 704-723, June.
    11. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 481-507, May-June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    quality innovation; quality inference; business cycles;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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