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A Flexible View on Prices

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  • Nuno Alves

Abstract

This paper argues that the flexible price paradigm is superior to the sticky price paradigm in the context of general equilibrium models. Based on a quarterly data set for six G7 economies, the paper presents two types of evidence showing that prices respond significantly to their underlying fundamentals. First, prices respond contemporaneously and significantly to technology shocks in all countries. Second, the cyclical correlation between prices and unit labor costs is highest contemporaneously and around 0.8 in all cases. This behavior is only consistent with a model where most firms set prices flexibly.

Suggested Citation

  • Nuno Alves, 2004. "A Flexible View on Prices," Working Papers w200406, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w200406
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    File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/wp200406.pdf
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    References listed on IDEAS

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    Cited by:

    1. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2011. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 225-247, April.
    2. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2011. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 225-247, April.

    More about this item

    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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