Relative-Price Changes as Aggregate Supply Shocks / Laurence Ball, N. Gregory Mankiw.

Format:

Book

Author/Creator:

Ball, Laurence.

Contributor:

National Bureau of Economic Research.

Mankiw, N. Gregory.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4168.

NBER working paper series no. w4168

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1992.

Summary:

This paper proposes a theory of supply shocks, or shifts in the short-run Phillips curve, based on relative-price changes and frictions in nominal price adjustment. When price adjustment is costly, firms adjust to large shocks but not to small shocks, and so large shocks have disproportionate effects on the price level. Therefore, aggregate inflation depends on the distribution of relative-price changes: inflation rises when the distribution is skewed to the right, and falls when the distribution is skewed to the left. We show that this theoretical result explains a large fraction of movements in postwar U.S. inflation. Moreover, our model suggests measures of supply shocks that perform better than traditional measures, such as the relative prices of food and energy.

Notes:

Print version record

September 1992.