Showing papers on "Price level published in 1973"

Some International Evidence on Output-Inflation Tradeoffs.

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.

The stability of models of money and growth with perfect foresight

Abstract: SEVERAL ECONOMISTS2 have argued that if individuals correctly perceive the rate of inflation so that their expectations are "rational," then deterministic models of money and economic growth are unstable. In this view, points on the steady state equilibrium paths examined by Tobin [9] and others are "saddlepoints," there being a tendency to diverge more and more from such a path as time elapses if the system is not initially on the path. The source of instability is understood most easily in the context of a model in which money is "neutral," with real growth and capital accumulation both being exogenous with respect to the money supply and price level and, moreover, with both equaling zero. Time is continuous. The price level P and money supply M are assumed at each moment to satisfy the demand function for real balances

On a Correct Measure of Inflation

Abstract: Two commonly cited and newsworthy price indices are the Bureau of Labor Statistic's Consumer Price Index and the Commerce Department's GNP deflator. These indices have become an important part of our economic intelligence and are frequently considered to be the operational counterparts of what economists call "the price level." They, therefore, often are used as measures of inflation and often are targets or indicators of monetary and fiscal policy. Nevertheless, these price indices, which represent measures of current consumption service prices and current output prices, are theoretically inappropriate for the purpose to which they are generally put. The analysis in this paper bases a price index on the Fisherian tradition of a proper definition of intertemporal consumption and leads to the conclusion that a price index used to measure inflation must include asset prices. A correct measure of changes in the nominal money cost of a giverl utility level is a price index for wealth. If monetary impulses are transmitted to the real sector of the economy by producing transient changes in the relative prices of service flows and assets (i.e., by producing short-run changes in "the" real rate of interest), then the commonly used, incomplete, current flow price indices provide biased short-run measures of changes in "the purchasing power of money." The inappropriate indices that dominate popular and professional literature and analyses

I Discovered the Phillips Curve: "A Statistical Relation between Unemployment and Price Changes"

Abstract: The possible relation between changes in the price level and changes in the volume of employment, much discussed by economists at the present time, has already been debated in the pages of the Review. In the present article Professor Fisher, one of the foremost authorities on monetary problems and for years a protagonist of stabilisation, removes the question from the sphere of controversy to that of exact statistical research. He has found a remarkably high correlation between the rate of price changes and employment, and he describes the methods by which he has achieved this result. The data used refer exclusively to the United States, and further research would be required before the conclusions could be applied directly to other countries. Nevertheless, this objective statistical confirmation of a relation long asserted to exist is a highly important step in advance.

A CPI-Futures Market

Abstract: If governments cannot control inflation, consumers must learn to live with it, however difficult that may be.' But the task of adapting to the uncertainties of inflation could be eased by the development of appropriate forward markets. Commodity futures provide a hedge against fluctuations in the price of a limited menu of commodities ranging from plywood to frozen orange juice and pork bellies. And in the foreign exchange market, it is possible to hedge against future changes in the value of the dollar vis-a-vis other currencies. Why not extend the concept of a futures market to provide a means of hedging against fluctuations in the general price level, as measured by the market basket with which the Bureau of Labor Statistics constructs the consumer price index. A CPI-Future is a promise to pay a sum of money sufficient to buy, at a specified maturity date, a BLS market basket of goods which would have cost $1.00 if it had been purchased in the 1967 base year. Anyone who buys a CPI-Future through his broker will receive at maturity a sum of money equal to whatever the CPI turns out to be at that date; and at maturity the buyer will pay at the price determined in today's market for CPI-Futures. Conversely, the seller of a CPI-Future promises to deliver a specific amount of purchasing power, however many dollars that may turn out to be, in return for the number of dollars specified when the CPI-Future was sold. For example, if the equilibrium price of CPIFutures maturing 1 year hence is 130 when the CPI stands at 125, it means that next year's dollars are depreciated in the market place by 4 percent vis-h-vis the present. It also means that the buyer of a CPIFuture is guaranteed however many dollars are required to buy as much as $1.00 would have purchased in 1967; he has bought certainty.2

Relative Prices on Regulated Transactions of the Natural Gas Pipelines

Abstract: As in many regulated industries, jurisdiction of the commission regulating the natural gas pipelines does not encompass all transactions of the regulated companies. The Federal Power Commission does not regulate direct sales of the pipelines to industry, while it does set profit limits on sales to retail gas utilities companies. If regulation is effective, the prices on the regulated sales should be different from those on the unregulated industrial transactions, all else being equal. A model is constructed here of the behavior of the firm with split regulated-unregulated sales. Thenceforth, the model is tested against a sample of paired transactions. Thenceforth, the model is tested against a sample of paired transactions in the late 1960s. The findings are that price levels on regulated sales would not appear to have been different from those on unregulated sales, after account has been taken of cost and demand differences. The effects of regulation, while in the expected direction, were insubstantial. Moreover, the differences in the institution of price setting under regulation -- in particular, the widespread use of two-part tariffs -- if anything, enhanced the ability of the pipelines to charge identical regulated and unregulated prices.

A system of direct compensation payments to farmers as a means of reconciling short-run to long-run interests

Abstract: The paper is written to answer two questions. First, should a system of direct compensation payments be introduced for the improvement of the EEC's Common Agricultural Policy? Second, how to define the DCP-system in order to make its principle practicable in a way which makes it on the one hand acceptable to those who are farming from the beginning of the system as well as for those entering later on, and on the other hand acceptable to the other part of the population and to the governments concerned. It appears from the analysis of the first question that the purpose of the present market and price policy has to be changed fundamentally. What it should do is to ensure a level of producer prices for basic agricultural products which is consistent with a situation of equilibrium concerning a rehabilitated world market, instead of trying, as at present, to ensure prices for farm products which as far as practicable result in a reasonable degree of income parity for agriculture in its present form. Newly designed market and price regulations should therefore create within the member countries of the Common Market prices for agricultural products being equal to ‘normalized’ prices of a future world market which would not be distorted by overprotection of national or ‘common’ markets. The as yet unknown price level is thought to be approximated adequately by reducing the present level of EEC prices for basic farm products by about 20%. One of the functions of the direct compensation payments will be to provide for the immediate loss of income evolving from such a reduction in agricultural prices. The analysis of the second question shows that it is possible to design an adequate system of direct compensation payments. Adequate, because it reconciles the interest of the present and the coming farmers to the interest of society at large concerning food supply, environmental values and costs both. The DCP-system will not give rise to insuperable exchequer problems. It provides ample time for a reorientation of agriculture according to the patterns of comparative advantages within the Commom Market as well as in the world at large.

Inflation and Monetary Velocity in Latin America

Abstract: CONTROVERSIES involving inflation, particularly inflation in developing countries, have usually focused on Latin America.1 One major point which emerges from these controversies is the distinction between a fully anticipated, fully adjusted inflation and an inflation which proceeds with such irregularity that economic agents are able neither to anticipate nor to adjust completely. To the extent that individuals can anticipate and adjust to inflation, a higher rate of inflation will cause the income velocity of money to rise, as attempts are made to exchange money for hedges against inflation.' The influence of inflation on monetary velocity is less clear, however, under the conditions of imperfect anticipation and adjustment which prevail in Latin America. Not only are the rates of inflation in most Latin American countries high, but they also tend to be highly variable. In addition, most Latin American countries have less than perfect markets for hedging against inflation, and these are further restricted by the regulations often imposed on interest rates, prices and international trade in the wake of inflationary conditions.' The present paper examines the impact of inflation on the income velocity of money for sixteen Latin American countries over the period 1950-1969. Such an examination not only indicates the sensitivity of demand for real cash balances to changes in the price level, but also reflects the extent to which economic agents under conditions prevailing in Latin America can anticipate inflation and adjust by hedging. Aside from Cagan's well-known work on hyperinflation (Friedman, 1956, pp. 25117), most empirical studies of the demand for money in individual countries conclude that inflation does not have a significant impact on velocity.4 These studies generally argue that the small changes in the price level usually observed cannot be adequately anticipated or are not large enough to cover the costs of adjustment. A recent article by Melitz and Correa (1970) on international differences in income velocity, like most studies of individual countries (but contrary to theoretical expectations), also concludes that inflation does not influence velocity. This article, like the present study, uses international comparisons, but the findings differ substantially. Melitz and Correa find that the coefficient for the impact of inflation on velocity does not have the expected sign and therefore omit the inflation variable from further consideration. They argue that price changes are important only in cases of hyperinflation and that adjusting to mild inflation is too costly and difficult to be worthwhile. Having excluded inflation as an explanatory variable, Melitz and Received for publication May 24, 1972. Revision accepted for publication January 30, 1973. * The authors wish to thank Michael C. Lovell for many helpful comments and suggestions, Francisco Chaves for assistance with data collection and computational work, and the Wesleyan Computer Center for generous use of its facilities. ' Best known is the monetarist-structuralist controversy over the causes of inflation and the impact of inflation on economic development. See, for example, Baer and Kerstenetzky (1964), Johnson (1967, pp. 281-291) and Baer (1967). 2-Johnson (1967, pp. 104-142) identifies the tax on real cash balances as the essence of the quantity theory approach to inflation, and it is the efforts to escape this tax which cause monetary velocity to rise with inflation. 'In discussions of inflation and economic growth, more costs and benefits of inflation are attributed to structural imperfections rather than to the tax on real cash balances. Structuralists emphasize the benefits of inflation in circumventing market imperfections, while monetarists focus on the costs of inflation in conjunction with inappropriate government regulations. See Johnson (1967, pp. 281-291) and Baer (1967). 4 However, some studies in a collection edited by Meiselman (1970) provide limited support for a positive influence of inflation on velocity in several less-developed countries. Deaver (Meiselman, 1970, pp. 7-67), finds the rate of inflation to be a significant variable in explaining velocity changes in Chile during the period 1932-1955, while Campbell (Meiselman, 1970, pp. 339-386) finds a positive correlation between velocity and changes in the rate of inflation in a comparative study of South Korea and Brazil. In a cross-country study Perlman (Meiselman, 1970, pp. 297337) finds nominal interest rates or inflation rates (as proxies for the opportunity cost of holding money) to be significant in explaining international differences in liquid asset portfolios.

An Econometric Analysis of Price Behaviour in Pakistan

Abstract: In this paper an attempt has been made to explore the major causes of price level changes in West Pakistan during the past thirteen years and to deter¬mine their relative importance in explaining the price fluctuations. A supple¬mentary object of the paper is to develop a predictive mechanism which may be used to forecast the response of price level to changes in the explanatory variables used in the regression model. There is vast literature on inflation theory [3] but not so much on quanti¬tative evidence. Broadly, there are three groups of theories of inflation: the demand pull theories, which state that inflationary pressures result from aggregate demand exceeding aggregate supply at full employment; the cost-push theories, which stress the producers' power to pass on cost increases in higher prices even when demand remains unchanged. The third group of theories, which take a mid-way position between the demand-pull and the cost-push theories, are a number of structural theories, notably those associated with the names of Ackley, Eckstein, and Schultze [1,5,11]. According to Ackley, inflation results from mark-up of prices. He considers the price policies of the firms and the wage policies of the labour unions to be responsible for inflation. He puts forward the hypothesis that mark ups used by business in setting prices and those applied by the labour unions to their cost of living for getting higher wages tend to rise in an inflationary situation which results in pyramiding of costs. Professor Otto Eckstein advances the hypothesis that inflation may be caused by price increases in certain bottleneck industries even when there is no over-all excess demand in the economy.

Inflation and agriculture in the EEC

Abstract: The effects of inflation on the position of agriculture are investigated from two points of view: The relationship between overall price level increase and adjustment needs for the agricultural sector and the importance of different inflation rates in member countries of the EEC for the operation of the common agricultural price policy. A simple model for the quantitative investigation of the relative influence of inflation and economic growth on the adjustment requirements of German agriculture indicates comparatively stronger effects for increasing rates of inflation as compared to changes in rates of growth. The agricultural price adjustment mechanism in cases of parity changes between EEC member countries leads to an exact compensation of preceding inflationary gains and losses only for a specific set of conditions. According to an empirical test for France and Germany it is doubtful whether these conditions are met in reality. This leads to a discussion of alternative political measures.

An Evaluation of the Predictive Ability of the FRB Sensitive Price Index

Abstract: This article reviews the historical performance of the Federal Reserve Board Sensitive Price Index (SPI) in accord with the standards established for such an index by the Price Statistics Review Committee. Several empirical tests are outlined which can be used to assess the predictive performance of any leading indicator. These tests indicate that the SPI performs well as an indicator for business conditions but has little to offer for the problem of predicting price level changes.

The Supply of Rental Housing: Reply

Abstract: Ronald Grieson comments on two aspects of our paper: the plausibility of its results, and the interpretation of its empirical findings On empirical findings, we have no strong preference for our interpretation over Grieson's He shows, in essence, that if the general price level enters the supply function as well as the demand function, then our regression coefficients may imply elasticities of supply somewhat higher than the ones we presented The elasticities we presented ranged from 3 to 7; the ones he presents range from 4 to 22 Both Grieson's interpretation and ours lead to the same principal conclusion; namely, that " the long-run supply of housing services is less than perfectly elastic" (see de Leeuw and Ekanem, p 812) Both sets of elasticity estimates suffer from the problems of measurement error which our article discussed An advantage of Grieson's interpretation is that it implies higher reduced-form coefficients for the price level than for income per household, which fits the data better than our specification One disadvantage of his interpretation is that there is no clear theoretical basis for including the general price level in the supply function; if the supply function is the result of profit maximization subject to a production function for converting capital and operating inputs into housing services, then the only relevant prices would seem to be those of housing services, capital inputs, and operating inputs (all of which were already included in our specification) Possibly the general price level serves as a proxy for prices of inputs not covered by our measures But surely the general price level does not belong in the supply function simply because it appears in the demand function, as Grieson seems to argue On the plausibility of results, we have reservations about Grieson's position He finds a long-run rising supply price for housing services plausible because of the inelastic supply of land Both our elasticity estimates and his, however, refer to the elasticity of supply holding constant the price of land as well as prices of other inputs (See de Leeuw and Ekanem, pp 808, 810) Hence, the explanation of our findings cannot be the tendency for the price of land to rise as housing demand shifts upward We suspect that the explanation of our findings lies in diseconomies of scale in the maintenance, improvement, and conversion of existing housing capital To understand the connection between these activities and our study it is useful to distinguish between two meanings of "long run" in the housing market The first is a time period long enough for the total quantity of housing capital in a housing market to respond fully to changes in underlying conditions-a period whose length has been estimated to be of the order of magnitude of six years (See Richard Muth, p 76) The second is a time period long enough for not just the quantity, but theform of existing housing capital number of units per building, architectural style, location pattern within a housing market area, and so forth-to respond fully to changes in underlying conditions The second long run is surely a great deal longer than six years We believe that the results of our study apply to the first rather than the second of these long runs In the second long run, at least under competitive conditions, prices per unit of housing service presumably approach new construction prices (plus local land rents) for all types of housing Since the construction of new housing is a replicable process, we might expect (input prices aside) constant returns to scale to characterize, at least approximately, this long run In the first long run, however, there could be important quasi rents-positive or nega* The Urban Institute

An Annual Forecasting Model of the Quebec Economy

Abstract: An Annual Forecasting Model of the Quebec Economy. This paper presents an annual forecasting model of the Quebec economy. The model contains eighteen stochastic equations. It predicts the main aggregates of the Quebec national accounts as well as employment, labour force, the wage index, and the price level. This regional model is self-contained. Forecasts for year t are based only on data available to the Quebec Government by December 15 of t 1. The parameters have been estimated from post-war data, using a modified version of the two-stage least squares method. Forecasts for 1971, which were made with a preliminary version of the model, were reasonably accurate, especially for labour force and employment. Forecasts for 1972 suggest that it will be a year of moderate expansion, with high unemployment level.

On consistent intergroup comparisons of purchasing power of money

Abstract: There is some advantage in comparing price levels using consistent methods because this gives unique results. This paper examines some available methods of consistent comparison, pointing out difficulties associated with heterogeneous data, and suggesting adaptations yielding better comparisons. Next, the problem of non-availability of price and quantity decomposition is considered. Another problem relating to non-identical lists of commodities and quality differences is tackled by using linear programming instead of regression methodology, both methods using some transformed variables. The procedure suggested is likely eventually to be useful for comparison of dissimilar countries. Computations on some Indian population groups illustrate the findings.

The relative importance of monetary and fiscal variables in determining price level movements: a note

Abstract: ONE of the most perplexing problems of recent months has been the persistence of strong inflationary pressures despite restrictive monetary measures, higher marginal income tax rates in effect (from mid-1968 through mid-1970,) and the movement of the Federal budget into a $4.9 billion surplus (NIA basis) during fiscal 1969. The persistence of excessive price increases under these apparently restrictive conditions suggests the need for further inquiry into the strength and timing of monetary and fiscal measures, as well as other factors, in explaining price level movements.1 This note reports some results using a linear model with expectational, cost, monetary, and fiscal arguments to explain percentage changes in the consumer price index and the implicit GNP price deflator, 1952-1968. The study was intentionally confined to the post-Accord period to escape the constraints imposed on discretionary monetary policy by the "pegging" of interest rates in the early postwar period. In the early postwar period, the debate over the causes of inflation centered on cost-push and demand-pull theories. At that time, the primary issue was whether price level increases, given a fixed level of aggregate demand, would follow an autonomous rise in factor costs. In recent years, a conflict of views has arisen within the demand-pull school. Proponents of the monetary and income-expenditure approaches have offered widely divergent views of both the causes and cures of the post-1965 inflation.2 These various approaches to the inflationary phenomenon suggest that price level changes may be explained by a stochastic relation of the form

Reply to Professor D. Ringrose

Abstract: PROF. Ringrose's article is a welcome addition to the growing interest in developing a systematic approach to European economic history constructed from new developments in the social sciences. We find ourselves in agreement with some of his analysis. Moreover we have substantially elaborated the theory1 since we presented it in preliminary form in this journal, and we believe we can explain a number of the difficulties inherent in our first tentative presentation. We do, however, take exception to the following points in Ringrose's comment. (i) Much as we respect Prof. Slicher van Bath's pioneering study of European agrarian history, our model was neither drawn from his study nor is it essentially similar to one he employs. His model is in fact difficult to specify. The exact interaction between population, relative prices, and the absolute price level is never clearly spelled out. We, on the other hand, employ a general equilibrium model that specifies that relative prices are a function of population and invariant to the quantity of money or the absolute level of prices. Prof. van Bath considers the latter important and is interested in the absolute level of agricultural prices. We feel that it is the change in relative prices-the price of agricultural produce compared to the price of non-agricultural goods-that is important in inducing institutional change. (2) We make no apology for our assumption of "economic" man for two reasons. First, some assumptions are necessary for any explanation. Second, the assumption appears to be a good starting-ground since irrational and uneconomic behaviour throughout most of history doomed man to starvation and death. He could not afford the luxury of undertaking activities that made him worse off. This is increasingly true the further back in history we go since the tolerances within which man either survived or starved were much narrower than today. Furthermore, we in no way imply that our model explains all historical institutions. Clearly there were many institutions founded for non-economic reasons, and equally human behaviour was frequently motivated by other human drives. Yet it is difficult to counter the argument that those institutions, whatever their goals, that were economically most efficient survived. Few persons and no institutions ever escape the "scarcity" problem-all are continually faced with financial constraints. The ultimate test is whether the model we have developed

Macroeconomic Stability with a Positively Sloped IS Curve: A Further Examination

Abstract: The Modigliani stability condition states that the slope of the LM curve must be algebraically greater than that of the IS curve for economic stability to occur. This paper mathematically demonstrates that this theorem's validity does not necessarily guarantee stability for the macroeconomic system if the aggregate price level is a variable. Thus, the Modigliani stability condition may not be generalized beyond the scope of a crude IS-LM model having only income and the interest rate as endogenous.

Raintrap Performance on the Fishlake National Forest

Abstract: Many such "developments" have been organized mainly for division and sale to other speculator-buyers with little or no developmental work other than land surveys and tract boundary markers. The "whither bound" aspect of the present stock ranch price and value situation is something on which I choose not to guess. The answers lie to a considerable degree in a number of national economic forces, trends, and administrative actions, and there is no way to forecast these for any appreciable time period. They include such factors as continued regional shifts in population, the continued availability of large amounts of land credit, the continuation of a high level of economic activity and income, and the continued inflation of the general price level. Whatever the future trends may be, the ranch manager of today faces a situation full of hazards. I hardly need add that the ranch owner and operator who must pay interest upon any substantial part of today's ranch values has an uphill job in making an adequate familyliving income from a ranching enterprise. What appears to have been happening is that in the ranch credit or budgeting for the annual funds, the possible future capital value growth of the ranch has been anticipated in the provisions made in the annual funds for family living.

The cost of living, threshold bargaining and incomes policy1

Abstract: For trade union bargainers one of the infallible laws of political economy is that wages lag behind prices This means that in an inflationary era the real value of the wage to which their members are entitled will be eroded, and some compensation will have to be made for this at the next round of wage negotiations Therefore, changes in the cost of living since the last settlement will be regarded by trade unions as one of the most important factors to be taken into account in arriving at a new settlement This is implicit in the statement made by the TUC in 1971 that “it requires pay increases of at least 10 per cent simply to restore the real disposable pay of a union's previous settlement 12 months earlier” Economists, on the other hand, argue that once an inflation is under way, then economic agents will develop an inflationary psychology—that is, they will expect it to continue and will adjust their behaviour accordingly If this is correct, trade union bargainers will attempt to anticipate inflation by trying to fix the money wage at a higher level than they would aim for if the price level were more stable