Showing papers on "Price level published in 1993"

Oil Prices and Economic Activity: Is the Relationship Symmetric?

Abstract: This paper presents some evidence of an asymmetric effect of oil price spikes upon the U.S. economy. It appears that price increases may be associated with reductions in economic activities, while price decreases do not display a distinct relationship with the economy. Possible explanations for these results are offered. 27 refs., 1 fig., 2 tabs.

The rational effect of price promotions on sales and consumption

Abstract: We explore the rational effect of price variation on sales and consumption in markets where consumers are uncertain about the future price of goods. We first derive an optimal ordering policy which expresses the amount a consumer should purchase and consume in a given period as a function of the observed price of the good, the distribution of future prices, and the nature of his or her inventory. This policy extends previous normative models of inventory control, such as those by Golabi 1985 and Kalymon 1970 to the case where the amount to consume in a given period is an explicit decision variable and prices follow a first-order stochastic process. We then use this model to explore how changes in the long-run frequency and temporal correlations of price promotions should normatively affect the contemporaneous relationship between purchase, consumption and price. Among the predictions which follow from the model are that consumption should rationally increase with the size of existing inventories, the short-term sensitivity of sales to prices should be greater than that of consumption to price, and this discrepancy increases with decreases in the temporal correlation of price deals and the long-term relative frequency of price deals.

Nominal Income Targeting

Abstract: This paper discusses nominal income targeting as a possible rule for the conduct of monetary policy. We begin by discussing why a rule for monetary policy may be desirable and the characteristics that a good rule should have. We emphasize, in particular, three types of nominal income targets, which differ in how they respond to past shocks, to prices, and real economic activity. A key question is how any of these rules might be implemented in practice. We suggest that the consensus forecast of future nominal income could playa role in ensuring that the central bank does not deviate from its announced target. To show how economic performance might have differed historically if the Fed had been committed to some type of nominal income target, we offer simulations of a simple model of the economy. According to the simulations, the primary benefit of nominal income targeting would have been reduced volatility in the price level and the inflation rate. Whether real economic activity would have been less volatile is unclear.

The (Mis)Behaviour of the Aggregate Price Level

Abstract: This paper investigates the response of the price level to random monetary shocks through a model of the fixed cost of changing a nominal price. It shows that in an inflationary environment, an expansionary monetary shock is accommodated faster than a contractionary monetary shock. Furthermore, when the average rate of monetary expansion increases, the lag in response to a positive shock decreases. The study also proves that the relationship between the expected rate of inflation and the variance of real prices is positive only above a critical level of expected inflation. The most striking result in this area appears in the work of Caplin and Spulber (1987). They show that in the aggregate, when inflation is monotone, stickiness disappears even when all firms follow a strict {S, s} rule. In their model, since firms are uniformly distributed, discontinuous price adjustment at the firm level does not create stickiness at the aggregate level. Caballero and Engel (1992) extend this analysis to incorporate idiosyncratic shocks. They show that in the presence of (monotone) idiosyncratic shocks, the long-run stationary distribution of prices is the uniform distribution, but in the short run, when the distribution of prices is arbitrary, aggregate stickiness can result from firms' discontinuous price adjustments. In the present work, the focus shifts. I use a model where aggregate stickiness emerges naturally from firms' discontinuous price setting to investigate the effects of the rate of inflation on aggregate stickiness. This work shows that aggregate stickiness is negatively correlated with the rate of inflation: the higher the rate of inflation, the less sticky the response of the aggregate price level with respect to positive nominal shocks, and the closer the economy approaches the Caplin and Spulber model. Therefore, when modeling a dynamic inflation tax one must account not only for the decrease in the monetary base but also for the increase in the speed at which the aggregate price level 889

Consumer Evaluations of Multiple versus Single Price Change

Abstract: This article examines how consumer evaluations of multiple price changes differ from the evaluation of a single price change of an equal amount . Consistent with R. Thaler's theory about segregation versus integration of gains and losses, we find that multiple price decreases are evaluated more favorably than a single price decrease and multiple price increases are evaluated more unfavorably than a single price increase. However, these effects are moderated by consumer price uncertainty and relative magnitude of the prices being evaluated. Because price-uncertain consumers consider higher ranges of prices acceptable, they are less unfavorable to multiple price increases and more favorable to multiple price decreases than certain consumers. Moreover, when the magnitude of one price is very small relative to other prices, consumers' preference for multiple price decreases (relative to a single price decrease) is reduced. However, this effect is not found when there are price increases.

Irreversible Price-Induced Efficiency Improvements: Theory and Empirical Application to Road Transportation

Abstract: Energy demand since 1986 seems inconsistent with the notion of constant income and price elasticities reported in the literature. Energy demand growth remained sluggish despite the simultaneous substantial reduction in real fuel costs and increases in real income. This investigation differentiates, as it were, two different price effects that should explain this apparent asymmetry in energy demand. The first effect is embedded in the technical efficiency and therefore largely irreversible. The second effect revolves around consumers` decisions and hence is reversible. This dichotomy of the price effect provides a suitable framework to study energy demand (in this instance, road transport). Moreover, the projections and policy recommendations following from this framework differ from the standard symmetric specification. Moderate price increases will affect consumers` behaviour, while only sufficiently high gasoline prices will trigger further efficiency improvements. The present low growth rates of energy demand mask a much higher growth at the service level, therefore energy demand growth may accelerate as these efficiency gains die out (if price levels or price expectations remain low). 19 refs., 9 figs., 4 tabs.

Econometric Estimates of Prices Indexes for Personal Computers in the 1990s

Abstract: In this paper we construct a number of quality-adjusted price indexes for personal computers in the U.S. marketplace over the 1989- 92 time period. We generalize earlier work by incorporating simultaneously the time, age and vintage effects of computer models into a fully saturated parameterization, and then develop a corresponding specification test procedure. While the simple arithmetic mean of prices of models by year reveals a price decline of about 11% per year, use of a matched model procedure similar to that commonly used by government statistical agencies generates a much larger rate of price decline -- about 20% per year. Since the matched model procedure holds quality constant, it ignores quality change embodied in new models. When data on new and surviving models are used in the estimation of hedonic price equations, a variety of quality-adjusted price indexes can be calculated, with varying interpretations. Although there are some differences, we find that on average these quality-adjusted price indexes decline at about 30% per year, with a particularly large price drop occurring in 1992. Parameters in hedonic price equations for desktop PC models differ from those for mobile PCs. Moreover, quality-adjusted prices fall at a slightly lower AAGR for mobile models (24%) than for desktops (32%). We conclude that taking quality changes into account has an enormous impact on the time pattern of price indexes for PCs.

Price concessions, time on the market, and the actual sale price of homes

Abstract: This article examines the relationships between listing price concessions, time on the market, and the actual sale price of homes. The principal hypothesis that significant listing price concessions, usually the result of overpricing, can lead to real discounts on the final sale price is proven by our empirical results. We also found that the longer the time on the market, the higher the sale price, ceteris paribus. This finding is consistent with the theory that the longer a property remains on the market, the higher the probability is that a relatively superior selling price can be realized.

Price limits and stock market volatility in Taiwan

Abstract: There is no theoretical basis for determining whether the imposition of circuit breakers will have the desired effect of reducing stock market volatility A commonly cited benefit ascribed to price limits is that such measures provide a cooling-off period, allowing investors to re-evaluate market information and to reformulate a new investment strategy Another benefit is that price limits allow order imbalances to be publicized and that therefore they work to attract value traders In both these ways, proponents claim, price limits protect the market from violent movements Opponents of price limits argue that they serve no purpose other than to slow down or delay a price change They argue that even though price limits can stop the price of a share from free falling on the trading day when a shock hits, the price will continue to move toward equilibrium as new limits are established in subsequent trading periods According to this view, price limits only prolong the number of trading days it will take for the market to adapt to a disturbance toward equilibrium Given the above diverse viewpoints, the effects of price limits is an issue to be empirically tested Employing a projected standard deviation series with heteroscedasticity corrected as a measurement for stock volatility, and using both daily and monthly data, we test the hypothesis that a narrower price limit will curtail price fluctuation Our results do not show that price limits have a significant impact on reducing equity price volatility On the contrary, we find that price limits tend to slightly exacerbate price volatility We also find that serial correlations of stock returns are inversely related to the range of price limits, implying a delaying effect of price limits

Israel's Stabilization Program of 1985, or Some Simple Truths of Monetary Theory

Abstract: The period since the Second World War has seen many instances — particularly in Latin America — of repeatedly unsuccessful attempts by governments to eliminate three-digit inflation, not to speak of hyperinflation. A frequent pattern has been that the governments in question adopted policies which at first achieved near-stabilization of the price level, but which then led to such political pressures that after a short time the governments resumed their expansionary inflationary policies. These failures, in turn, generated a lack of credibility of the government in the eyes of the public that further militated against the success of subsequent attempts to achieve stabilization (see Bruno et al., 1988; Bruno and Meridor, 1991).

Intraday market behavior and the extent of feedback between s&p 500 futures prices and the s&p 500 index

Abstract: In this study we empirically examine the intraday lead/lag relation between S&P 500 futures prices and the S&P 500 index, and whether daily market characteristics are associated with changes in the relation. We estimate daily Geweke measures of feedback and regress time series of these measures on daily price volatility and volume characteristics. Results indicate that the contemporaneous price relation is substantive and that measures of contemporaneous feedback are positively associated with the daily range of the futures price. The primary implication is that the relation between cash and futures prices becomes stronger as futures price volatility increases. As volatility increases, information is being impounded at a faster rate so that futures and equity markets operate more closely as one market. Large futures price moves, by themselves, are not responsible for breakdowns in the stock-futures price relation.

Uncertain effects of money and the link between the inflation rate and inflation uncertainty

Abstract: In the postwar period high rates of inflation are associated with high levels of inflation uncertainty. In this paper I argue that the inflation rate and inflation uncertainty are linked by forecasters' uncertainty about the impact of money growth on the price level, and I present evidence indicating that this has been the case. As long as the impact of money growth on the price level remains unpredictable, then even predictable money growth will cause inflation uncertainty with its accompanying adverse effects on employment and output.

Household Welfare and the Pricing of Cocoa and Coffee in Côte d'Ivoire: Lessons from the Living Standards Surveys

Abstract: Cocoa and coffee are the most important crops in Cote d'Ivoire. Until recently, the difference between world and administered producer prices provided an important source of government revenue. As a result of a continued decline of world prices of both crops, however, the Ivoirien government was forced to cut producer prices in half. Because 40 percent of Ivoirien households grow either cocoa or coffee, this cut can be expected to have a considerable impact on the welfare level of these households. The authors use the 1985 Living Standards Measurement Survey to estimate the welfare effects of producer price changes for Ivoirien households, permitting an evaluation of the probable consequences of the recent price cut. Using nonparametric econometric techniques, they find that, although many households will suffer losses of income, the cuts will not have adverse distributional effects: cocoa and coffee farmers are scattered throughout the income distribution, but most are concentrated in the middle.

Inflation and Relative Price Variability: Parks' Study Reexamined

Abstract: The authors show that Richard W. Parks' (1978) widely cited evidence on the correlation between the rate of inflation and the variability of relative prices in the United States during 1948-75 depends on one observation, 1974. When the sample period is extended through 1989, the correlation depends on the observations for 1974 and 1980. Since both are years of large oil price shocks, the authors make the case that causation is likely to run from these shocks to relative price variability and inflation with accommodating monetary policy playing a role. Copyright 1993 by Ohio State University Press.

Dollar movements and inflation: a cointegration analysis

Abstract: Many studies have concluded that changes in US dollar values affect US prices. However, since exchange rates may reflect underlying economic conditions, this result may be spurious if those conditions are ignored. Recent advances in time series analysis permitted investigation of both the short and long term interactions between the US price level and the yen/dollar exchange rate, taking into account the effects of changes in domestic economic activity, such as income, interest rates and monetary policy. Examination of these interactions helps to determine to what extent the yen/dollar exchange rate impacts the domestic price level. The finding is that there is no long term relation between the two variables. In addition, the results suggest that in the short run, monetary authorities respond to changes in the consumer price index and Japanese exchange rates; however, the price level does not respond to change in the exchange rate.

Unit Labor Costs and the Price Level

Abstract: The “price markup” hypothesis says that prices are marked up over productivity-adjusted wages, implying that prices and wages must be correlated in the long run and that short-run movements in wages help predict short-run movements in prices. The empirical evidence reported here indicates that these implications are consistent with the data when prices are narrowly measured by the consumer price index, but not when they are broadly measured by the implicit GDP deflator. The general price level is correlated with labor costs in the long run, but the presence of this correlation appears to be due to Granger-causality running from prices to labor costs, not the other way around.

The Consumer Price Index as a Measure of Inflation

Abstract: As inflation approaches zero, it becomes increasingly important to examine the price indices on which monetary policy is based. The most popularly used aggregate price statistic in the U.S. is the Consumer Price Index (CPI), a statistic that appears to be a focal point in monetary policy deliberations. A problem associated with using the CPI, a fixed weight index of the cost-of-living, is that there are likely to be biases in the index as a measure of inflation. In this paper we use a simple statistical framework to compute a price index that is immune to one of the potentially important biases inherent in the CPI as a measure of inflation--weighting bias. Utilizing a dynamic factor model we are able to compute the common inflation element in a broad cross-section of consumer price changes. Our conclusion is that, although there was a large positive weighting bias during the fifteen years beginning in 1967, since 1981 the weighting bias in the CPI as a measure of inflation has been insignificant.

Are There Useful Lessons from the 1990-91Oil Price Shock?

Abstract: Following Iraq`s invasion of Kuwait, oil prices temporarily doubled. This paper examines the hypothesis that the U.S. economy had changed following previous oil price shocks, so that the 1990 oil price rise (and its subsequent decline) had smaller effects than previously. It also examines a related hypothesis that such a transitory oil price hike would have little or no macroeconomic effect. It surveys and rejects arguments for a reduced impact of oil price shocks and for hysteresis. The article argues that recent experience was comparable in magnitude to earlier shocks and that there were comparable macroeconomic developments and changes in the composition of output. The paper concludes with a test of the effect of energy prices on the misery index and shows that recent changes in misery are consistent with previous experience. 27 refs., 4 figs., 3 tabs.

Price Liberalization in Russia: Behavior of Prices, Household Incomes, and Consumption During the First Year

Abstract: Prices in the Russian Federation have been decontrolled in several steps since early 1991, after decades of near fixity. This paper documents and analyzes the behavior of prices, income, consumption, and savings before and after the January 1992 price liberalization, with emphasis on developments during 1992, and with focus on households more than on enterprises. Comparisons are made with recent experience in Central and Eastern Europe, along with consideration of evidence on shortages and income distribution.

A test for price integration in the EC lamb market

Abstract: The purpose of this paper is to test for price integration in the British-French markets for lamb in the period after the introduction of the EC sheepmeat regime in 1980. A Holmes-Hutton rank order procedure is used to determine if price changes in one market cause price changes in the other market and thus define an integrated market. Using weekly price data for the period 1983-86, the results indicate that the British-French lamb markets are integrated in that a price change in one market is fully reflected in price changes in the other. However, there is considerable lag time in response to price changes. This may be attributed to less than perfect substitution between the British and French product, to the ex post nature of the clawback provision that existed in the British price support system during the period of analysis, and to informal trade barriers.

Gradual versus rapid liberalization in socialist economies : the problem of macroeconomic control

Abstract: From 1978 to 1992 China experienced gradual liberalization with a fairly stable price level. The more rapid liberalization attempted after 1989 in Eastern Europe, and the former USSR generated much higher inflation. Yet both regions' fiscal policies were similar. As in formerly socialist Europe, in China the share of government revenue in gross national product (GNP) has fallen sharply. Nevertheless, China avoided resorting to the inflation tax. The resulting enormous growth in saving and in stock of financial assets allowed the liberalized sector to finance itself, the Chinese Government, and the deficits of the slowly reforming state enterprises. Important aspects of China's dualistic banking and pricing policies could well be adopted in other transitional socialist economies. But such incredibly high real financial growth is not feasible in Russia or in formerly socialist Europe. Thus, to prevent inflation, fiscal reforms should come much earlier in their transitions than they did in China's.

Irving Fisher and His Compensated Dollar Plan

Abstract: This is a story that illustrates the interrelationship between economic history and economic thought: more precisely, between monetary history and monetary thought. So let me begin with a very brief discussion of the relevant history. In 1879, the United States returned to the gold standard from which it had departed at the time of the Civil War. This took place in a period in which "a combination of events, including a slowing of the rate of increase of the world's stock of gold, the adoption of the gold standard by a widening circle of countries, and a rapid increase in aggregate economic output, produced a secular decline...in the world price level measured in gold...." (Friedman and Schwartz 1963, p. 91; for further details, see Friedman 1990, and Laidler 1991, pp. 49-50). The specific situation thus generated in the United States was described by Irving Fisher(1-913c, p. 27) in the following words: "For a quarter of a century--from 1873 to 1896--the dollar increased in purchasing power and caused a prolonged depression of trade, culminating in the political upheaval which led to the free silver campaign of 1896, when the remedy proposed was worse than the disease." This was, of course, the campaign which climaxed with William J. Bryan's famous "cross of gold" speech in the presidential election of 1896. Fisher's view of this campaign reflected the fact that it called for the unlimited coinage of silver at a mint price far higher than its market value, a policy that would have led to a tremendous increase in the quantity of money and the consequent generation of strong inflationary pressures. Though Bryan was defeated in the subsequent election, his objective was nevertheless accomplished by the unprecedented increase in the output of gold that began in the 1890s as a result of the discovery of new gold deposits in South Africa and Alaska, as well as the development of more efficient processes for the extraction of gold from the ore. Thus the world output of gold in 1899 was nearly three times the average annual output during the 1880s, and in 1905 it was nearly four times as large (Wright 1941, pp. 825-26). As a result, the U.S. price level increased from 1896 to 1913 by almost 50 percent--a fact duly noted and emphasized by Fisher (1913b, p. 217).(1) It was this 40-year experience of serious economic, political, and social problems generated by significant changes in the price level--in either direction-that led Fisher to formulate his compensated dollar plan for stabilizing it. Another important fact is that "guilt by association" with the declared objective of the silver campaign to generate a great increase in the quantity of money and hence in prices had caused the quantity theory itself to fall into disrepute. This situation was clearly reflected in Fisher's statement in the preface to his 1911 Purchasing Power of Money that "it would seem that even the theorems of Euclid would be challenged and doubted if they should be appealed to by one political party as against another....The attempts by promoters of unsound money to make an improper use of the quantity theory--as in the first Bryan campaign--led many sound money men to the utter repudiation of the quantity theory." In fact, that situation was the immediate reason for Fisher's writing the book; namely, that "the quantity theory needs to be reintroduced into general knowledge" (ibid., p. viii). Note finally that when in 1913 Fisher proposed his compensated dollar plan, the Federal Reserve System had not yet come into existence. Though the Act establishing it was approved toward the end of that year, the role that it might play in stabilizing the price level did not become part of general thinking about monetary policy until the 1920s. This delay was due in part to the fact that in the first years of the Federal Reserve System, its policy was more or less dictated by the exigencies of World War I and, in part, to the time that was naturally needed for the System to gain experience in the workings of monetary policy (see Barer 1964, Chap. …

Measuring the Aggregate Price Level: Implications For Economic Performance and Policy

Abstract: A comparison of economic performance of nations usually involves a minimum of three measures, the unemployment rate, inflation rate, and growth rate of real output per person (or per employee-hour).1 Of these three, the measurement of two (inflation and real output per person) requires an accurate estimate of the aggregate price level. The inflation rate, of course, is simply the rate of change of the aggregate price level, while real output is equal to nominal expenditure or income divided by the aggregate price level. In this sense accurate measurement of the aggregate price level is one of the most important tasks of national accounting.