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Stable price level and changing prices

  • Antti Suvanto

    (Bank of Finland)

  • Juhana Hukkinen

    (Bank of Finland)

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    The paper investigates the relationship between relative price movements and changes in the aggregate price level using monthly data on Finland’s Consumer Price Index and its components from the period covering the past eight and a half years. This was a period of very low inflation. The rate of growth in the aggregate price level was occasionally very close to zero. The paper shows that declining nominal prices were a rather common phenomenon during this period of low or no inflation. The declining prices cannot, however, be explained by lack of demand or any generalized deflationary tendencies. Hence, the downward rigidity of nominal prices has not prevented relative price adjustments under price stability. The paper develops a new method for looking at the composition of inflation and illustrating how relative price dynamics interact with changes in the aggregate price level. The correlation of relative price variability and aggregate inflation has been negligible, but the correlation between the skewness of price change distribution and aggregate inflation is high. This is in accordance with the predictions of the menu cost models. A significant proportion of the relative price changes appear to have been persistent, suggesting the dominance of productivity and other supply shocks.

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    File URL: http://econwpa.repec.org/eps/mac/papers/0508/0508034.pdf
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    Paper provided by EconWPA in its series Macroeconomics with number 0508034.

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    Length: 35 pages
    Date of creation: 31 Aug 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpma:0508034
    Note: Type of Document - pdf; pages: 35. Bank of Finland Discussion Papers 28/2004
    Contact details of provider: Web page: http://econwpa.repec.org

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    1. David G. Mayes & Matti Virén, 2004. "Asymmetries in the Euro area economy," Macroeconomics 0404024, EconWPA.
    2. Paloviita, Maritta & Mayes, David, 2005. "The use of real-time information in Phillips-curve relationships for the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 415-434, December.
    3. Bagella, Michele & Becchetti, Leonardo & Hasan, Iftekhar, 2004. "The anticipated and concurring effects of the EMU: exchange rate volatility, institutions and growth," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 1053-1080.
    4. Paloviita , Maritta, 2002. "Inflation dynamics in the euro area and the role of expectations," Research Discussion Papers 20/2002, Bank of Finland.
    5. Koskela , Erkki & Uusitalo , Roope, 2004. "Unintended convergence – how Finnish unemployment reached the European level," Research Discussion Papers 6/2004, Bank of Finland.
    6. Hyytinen, Ari & Takalo , Tuomas, 2004. "Multihoming in the market for payment media: evidence from young Finnish consumers," Research Discussion Papers 25/2004, Bank of Finland.
    7. Allen N. Berger & Iftekhar Hasan & Leora F. Klapper, 2003. "Further evidence on the link between finance and growth: an international analysis of community banking and economic performance," Finance and Economics Discussion Series 2003-47, Board of Governors of the Federal Reserve System (U.S.).
    8. Herrendorf, Berthold & Teixeira, Arilton, 2004. "Monopoly rights can reduce income big time," Research Discussion Papers 7/2004, Bank of Finland.
    9. Mayes , David G., 2004. "An approach to bank insolvency in transition and emerging economies," Research Discussion Papers 4/2004, Bank of Finland.
    10. Kauppi, Heikki & Koskela, Erkki & Stenbacka, Rune, 2004. "Equilibrium Unemployment and Investment Under Product and Labour Market Imperfections," IZA Discussion Papers 1058, Institute for the Study of Labor (IZA).
    11. Guse, Eran, 2004. "Expectational business cycles," Research Discussion Papers 19/2004, Bank of Finland.
    12. Martin Ellison & Lucio Sarno & Jouko Vilmunen, 2004. "Monetary policy and learning in an open economy," Macroeconomics 0404022, EconWPA.
    13. Schaling , Eric & Eijffinger , Sylvester & Tesfaselassie , Mewael, 2004. "Heterogeneous information about the term structure, least-squares learning and optimal rules for inflation targeting," Research Discussion Papers 23/2004, Bank of Finland.
    14. Rautureau, Nicolas, 2004. "Measuring the long-term perception of monetary policy and the term structure," Research Discussion Papers 12/2004, Bank of Finland.
    15. Castrén, Olli & Takalo, Tuomas & Wood, Geoffrey, 2004. "Labour market reform and the sustainability of exchange rate pegs," Working Paper Series 0406, European Central Bank.
    16. Jokivuolle , Esa & Lanne , Markku, 2004. "Trading Nokia: The roles of the Helsinki vs the New York stock exchanges," Research Discussion Papers 26/2004, Bank of Finland.
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