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Stable price level and changing prices

Author

Listed:
  • Antti Suvanto

    (Bank of Finland)

  • Juhana Hukkinen

    (Bank of Finland)

Abstract

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.

Suggested Citation

  • Antti Suvanto & Juhana Hukkinen, 2005. "Stable price level and changing prices," Macroeconomics 0508034, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0508034 Note: Type of Document - pdf; pages: 35. Bank of Finland Discussion Papers 28/2004
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    File URL: http://econwpa.repec.org/eps/mac/papers/0508/0508034.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. KANGASSALO Pertti & TAKALA Kari, "undated". "Measuring the Usefulness of Consumers’ Inflation Expectations in Finland," EcoMod2003 330700076, EcoMod.
    2. Fabio Rumler & Alfred Stiglbauer & Josef Baumgartner, 2011. "Patterns and Determinants of Price Changes: Analysing Individual Consumer Prices in Austria," German Economic Review, Verein für Socialpolitik, vol. 12(3), pages 336-350, August.
    3. Luc Aucremanne & Guy Brys & Peter J Rousseeuw & Anja Struyf & Mia Hubert, 2003. "Inflation, relative prices and nominal rigidities," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 81-105 Bank for International Settlements.
    4. Josef Baumgartner & Ernst Glatzer & Fabio Rumler & Alfred Stiglbauer, 2005. "How Frequently Do Consumer Prices Change in Austria? Evidence from Micro CPI Data," Working Papers 101, Oesterreichische Nationalbank (Austrian Central Bank).
    5. Silvia Fabiani & Angela Gattulli & Roberto Sabbatini, 2003. "La rigidità dei prezzi in Italia," Moneta e Credito, Economia civile, vol. 56(223), pages 325-358.
    6. Luc Aucremanne & Emmanuel Dhyne, 2004. "How frequently do prices change? Evidence based on the micro data underlying the Belgian CPI," Working Paper Research 44, National Bank of Belgium.
    7. Fabiani, Silvia & Gattulli, Angela & Sabbatini, Roberto, 2004. "The pricing behaviour of Italian firms: new survey evidence on price stickiness," Working Paper Series 333, European Central Bank.

    More about this item

    Keywords

    price level; inflation; deflation; prices; business cycles;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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