Topic
Price level
About: Price level is a research topic. Over the lifetime, 10731 publications have been published within this topic receiving 293136 citations. The topic is also known as: general price level.
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TL;DR: In this article, the authors developed a model of staggered prices along the lines of Phelps (1978) and Taylor (1979, 1980), but utilizing an analytically more tractable price-setting technology.
8,580 citations
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TL;DR: A number of recent studies have weighed in with fairly persuasive evidence that real exchange rates (nominal exchange rates adjusted for differences in national price levels) tend toward purchasing power parity in the very long run as discussed by the authors.
Abstract: FIRST ARTICULATED by scholars of the ISalamanca school in sixteenth century Spain,1 purchasing power parity (PPP) is the disarmingly simple empirical proposition that, once converted to a common currency, national price levels should be equal. The basic idea is that if goods market arbitrage enforces broad parity in prices across a sufficient range of individual goods (the law of one price), then there should also be a high correlation in aggregate price levels. While few empirically literate economists take PPP seriously as a short-term proposition, most instinctively believe in some variant of purchasing power parity as an anchor for long-run real exchange rates. Warm, fuzzy feelings about PPP are not, of course, a substitute for hard evidence. There is today an enormous and evergrowing empirical literature on PPP, one that has arrived at a surprising degree of consensus on a couple of basic facts. First, at long last, a number of recent studies have weighed in with fairly persuasive evidence that real exchange rates (nominal exchange rates adjusted for differences in national price levels) tend toward purchasing power parity in the very long run. Consensus estimates suggest, however, that the speed of convergence to PPP is extremely slow; deviations appear to damp out at a rate of roughly 15 percent per year. Second, short-run deviations from PPP are large and volatile. Indeed, the one-month conditional volatility of real exchange rates (the volatility of deviations from PPP) is of the same order of magnitude as the conditional volatility of nominal exchange rates. Price differential volatility is surprisingly large even when one confines attention to relatively homogenous classes of highly traded goods. The purchasing power parity puzzle then is this: How can one reconcile the enormous short-term volatility of real exchange rates with the extremely slow rate at which shocks appear to damp out? Most explanations of short-term exchange rate volatility point to financial factors such as changes in portfolio preferences, short-term asset price bubbles, and monetary shocks (see, for example, Maurice Obstfeld and Rogoff forthcoming). Such shocks can have substantial effects on the real economy in the presence of sticky nominal wages and prices. I See Lawrence H. Officer (1982, ch. 3) for an extensive discussion of the origins of PPP theory; see also Dornbusch (1987).
2,901 citations
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TL;DR: In this article, a structural decomposition of the real price of crude oil is proposed, based on a newly developed measure of global real economic activity, and the authors estimate the dynamic effects of these shocks on the real prices of oil.
Abstract: Using a newly developed measure of global real economic activity, a structural decomposition of the real price of crude oil into three components is proposed: crude oil supply shocks; shocks to the global demand for all industrial commodities; and demand shocks that are specific to the crude oil market. The latter shock is designed to capture shifts in the price of oil driven by higher precautionary demand associated with concerns about future oil supply shortfalls. The paper estimates the dynamic effects of these shocks on the real price of oil. A historical decomposition sheds light on the causes of the major oil price shocks since 1975. The implications of higher oil prices for U.S. real GDP and CPI inflation are shown to depend on the cause of the oil price increase. Changes in the composition of shocks help explain why regressions of macroeconomic aggregates on oil prices tend to be unstable. Evidence that the recent increase in crude oil prices was driven primarily by global aggregate demand shocks helps explain why this oil price shock so far has failed to cause a major recession in the U.S.
2,670 citations
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TL;DR: In this paper, the results of an empirical study of real output-inflation tradeoffs, based on annual time-series from eighteen countries over the years 1951-67, were examined from the point of view of the hypothesis that average real output levels are invariant under changes in the time pattern of the rate of inflation.
Abstract: This paper reports the results of an empirical study of real output-inflation tradeoffs, based on annual time-series from eighteen countries over the years 1951-67. These data are examined from the point of view of the hypothesis that average real output levels are invariant under changes in the time pattern of the rate of inflation, or that there exists a "natural rate" of real output. That is, we are concerned with the questions (i) does the natural rate theory lead to expressions of the output-inflation relationship which perform satisfactorily in an econometric sense for all, or most, of the countries in the sample, (ii) what testable restrictions does the theory impose on this relationship, and (iii) are these restrictions consistent with recent experience? Since the term "'natural rate theory" refers to varied aggregation of models and verbal developments,' it may be helpful to sketch the key elements of the particular version used in this paper. The first essential presumption is that nominal output is determined on the aggregate demand side of the economy, with the division into real output and the price level largely dependent on the behavior of suppliers of labor and goods. The second is that the partial "rigidities" which dominate shortrun supply behavior result from suppliers' lack of information on some of the prices relevant to their decisions. The third presumption is that inferences on these relevant, unobserved prices are made optimally (or "rationally") in light of the stochastic character of the economy. As I have argued elsewhere (1972), theories developed along these lines will not place testable restrictions on the coefficients of estimated Phillips curves or other single equation expressions of the tradeoff. They will not, for example, imply that money wage changes are linked to price level changes with a unit coefficient, or that {"long-run"' (in the usual distributed lag sense) Phillips curves must be vertical. They will (as we shall see below) link supply parameters to parameters governing the stochastic nature of demand shifts. The fact that the implications of the natural rate theory come in this form suggests an attempt to test it using a sample, such as the one employed in this study, in which a wide variety of aggregate demand behavior is exhibited. In the following section, a simple aggregative model will be constructed using the elements sketched above. Results based on this model are reported in Section II, followed by a discussion and conclusions.
2,373 citations
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TL;DR: In this paper, it is shown that the bid-ask spread is a positive function of the price level and return variance, a negative function of measures of market activity, depth, and continuity, and negatively correlated with the degree of competition.
Abstract: An individual who chooses to serve as a market-maker is assumed to optimize his position by setting a bid-ask spread which maximizes the difference between expected revenues received from liquidity-motivated traders and expected losses to informationmotivated traders. By characterizing the cost of supplying quotes, as writing a put and a call option to an information-motivated trader, it is shown that the bid-ask spread is a positive function of the price level and return variance, a negative function of measures of market activity, depth, and continuity, and negatively correlated with the degree of competition. Thus, the theory of information effects on the bid-ask spread proposed in this paper is consistent with the empirical literature. THIS PAPER IS CONCERNED with the determination of bid-ask spreads in organized financial markets, where the trading is done through economic agents who specialize in market-making for a limited set of securities. The commitment made by dealers to buy or sell at the bid and ask prices, respectively, is analyzed as a combination of put and call options, and empirical results published in previous works are shown to be consistent with the model. While there have been several papers concerned with the bid-ask spread, no entirely satisfactory theory has yet emerged. Demsetz [10] was the first to formalize the problem. He treated the bid-ask spread as a (transaction) cost to the trader for immediacy, and analyzed it in a static supply and demand framework.
1,985 citations