INFLATION AND ASYMMETRIC OUTPUT ADJUSTMENTS BY FIRMS

Using ordered probit analyses of a unique micro data set, we find evidence of output asymmetry that is systematically related to inflation and to price asymmetry. As predicted by theory, firms are more likely at higher rates of inflation to raise prices in response to positive cost and demand shocks and less likely to lower prices in response to negative cost and demand shocks. The expected effects of higher inflation on output asymmetry, however, come primarily from cost and demand increases and to a lesser (and statistically insignificant) extent from cost and demand decreases. (JEL E3, D4)     

STOCHASTIC INFLATION AND THE OPTIMAL POLICY OF PRICE ADJUSTMENT

This paper analyzes the optimal policy of price adjustment for a monopolistic firm in the presence of stochastic inflation. It shows that an increase in the expected rate of inflation or in the cost of price adjustment leads to an increase in the initial real price and a decrease in the terminal real price in each period with a fixed nominal price. It also shows that the effects of increased riskiness of inflation are ambiguous.     

OUTPUT EFFECTS OF INFLATION WITH FIXED PRICE– AND QUANTITY–ADJUSTMENT COSTS

This article examines how the aggregate production varies with inflation when there are fixed price– and quantity–adjustment costs. It shows that such variation is determined by the elasticity of the firms’ marginal real revenue with respect to demand. The aggregate production decreases with inflation if this elasticity always exceeds minus unity, whereas the aggregate production increases with inflation if the elasticity is always less than minus unity. The aggregate production is independent of inflation in the special case that the elasticity always equals minus unity. The latter occurs if demand is derived from a log‐quadratic utility function. (JEL E31)     

Assisted homeownership, investment and their roles in private property price dynamics in Hong Kong

Hong Kong not only has one of the most institutionally-involved housing markets, but also one of the most developed stock markets in the world. In the meantime, the function of real estate has become increasingly important, yet increasingly vague at the same time. This paper attempts to explore the significant factors in the price adjustments of residential properties. It is found that while most market fundamentals are not significant in explaining property price movements, the roles of investment concerns and of government policy changes in assisted homeownership (HOS) are much more critical in this regard. On the one hand, real estate prices are driven more by investor demand, rather than by user demand; and residential properties are used to hedge against price risks in the stock market, instead of against inflation. On the other hand, while the upgrading hypothesis is confirmed in this study, the situation of Hong Kong turns out to be a bit different from the Singapore experience. As the production of HOS flats is suspended until further notice, the resale HOS market has managed to pull a fraction of homebuyers from the private sector. This particular finding shows that the government’s decision to suspend HOS flat production and sale in Fall 2002 has not accomplished what was intended to achieve. Instead, this leads to several implications, which are then discussed.     

WAGE DIFFERENTIALS ACROSS LABOR MARKETS AND WORKERS: DOES COST OF LIVING MATTER?

Wage differential studies rarely account for interarea differences in cost of living, owing both to data limitations and theoretical ambiguity. This study develops a price index for 185 metropolitan areas comprising about 70% of the U.S. labor force. Current Population Survey data for 1985–95 and data on site-specific amenities are used to estimate earnings differentials based on nominal wages, wages fully adjusted for measured cost of living, and a simple approximation of "real" wages with partial adjustment for price-level differences. Dispersion in approximate real wages across 185 labor markets and differentials by region and city size are substantially lower than dispersion in nominal or full adjustment wages. Estimates of racial and ethnic differentials display moderate sensitivity to choice of a wage measure, whereas other standard differentials do not. Both nominal wages and wages fully adjusted for cost of living may provide misleading estimates of real wage differentials. Absent data on interarea prices and amenities, researchers should include detailed controls for region and city size in nominal wage equations. ( JEL J31, R23)     

ASYMMETRY IN THE EFFECTS OF MONETARY AND GOVERNMENT SPENDING SHOCKS: CONTRASTING EVIDENCE AND IMPLICATIONS

Using quarterly data for the United States, demand contraction exceeds expansion in the face of monetary and government spending shocks. Demand contraction in the face of government spending shocks, is absorbed in nominal wage and price deflation. The variability of government spending shocks decreases average wage and price inflation. In contrast, the upward flexibility of price appears in sharp contrast to its downward rigidity in the face of monetary shocks. Furthermore, output contraction is notably larger relative to expansion in the face of monetary shocks. Monetary variability accelerates average price inflation and decreases average output and real wage growth.     

INTERNATIONAL PRICE BEHAVIOR AND THE DEMAND FOR MONEY

Oil prices, commodity prices and American monetary policy, the last operating through a variety of channels, have all figured prominently in explanations of the international inflation process in the late 1960s and early 70s. OUT major purpose in this paper is to test these various hypotheses. We do so in the context of a reduced-form rational-expectations price equation which we estimate for the United States and seven other industrial countries using quarterly data for the period 1955 through 1976.
The principal conclusion that emerges from this exercise is that movements in domestic money in these countries served as the key link in the inflation process. The factors that produced these monetary changes, however, differed among countries. Price shocks of various sorts were clearly of secondary importance.
The other important set of conclusions concerns the demand for money. In place of a traditional stock adjustment model, we used GLS with a second-order correction for autocorrelation. We believe this produced more plausible estimates of the parameters of the long-run demand function and of the adjustment process itself.     

Frequency of price increases and perceived inflation. An experimental investigation

The effect of frequency of subjective experience of price increases on perceived inflation, i.e. the subjective experience of general price development, is investigated. The paper presents a two-phased psychological model of perceived inflation: first, information about product price increases is gathered in daily purchase. Second, these are integrated into one perceived inflation judgment. In the integration phase, the complexity of the task should trigger heuristic processing: higher frequency of price increases should enhance their availability and thus perceived inflation. Participants simulated purchases in two scenarios. Frequency of products with increased prices was varied while overall expenditure increases as well as relative price increase of individual products were balanced. Experiment 1 presented a high frequency condition with a majority of increased prices relative to previously learned reference prices and a low frequency condition with a majority of stable prices. Experiment 2 balanced cognitive effort for product price change estimation over conditions by replacing absolutely stable prices with slightly increased prices. As predicted, perceived inflation was higher with high frequencies of increased prices, while price increases of individual products were judged correctly. Experiment 3 ruled out the alternative hypothesis that presentation duration, which in the previous experiments correlated with presentation frequency, might have been the determining factor.     

Nominal and Real Disturbances and Money Demand in Chinese Hyperinflation

This article reexamines the dynamics of hyperinflation by allowing variability in the relative price of capital goods in units of consumption goods that reflects interactions between the real and monetary sectors. The theory generates empirically testable implications that suggest expanding the standard Caganian money demand function to include both anticipated inflation and relative price effects in a nonlinear fashion. Employing data from the post–WW II Chinese hyperinflationary episode, the empirical findings suggest that conventional econometric investigations of money demand during hyperinflation overlook important nonlinear interactions between real and monetary activities and, hence, underestimate the welfare costs of hyperinflation.     

Roles of Stock Price and Exchange Rate in Slovakia's Money Demand Function and Policy Implications

The demand for real M1 in Slovakia is positively influenced by real output and the stock price and negatively associated with the deposit rate, depreciation of the koruna, the euro interest rate, and the expected inflation rate. Considering the goods and the money market simultaneously, these results suggest that a higher stock price may or may not cause real output to rise and that a depreciation of the koruna or a higher euro interest rate would help raise Slovakia's real output. The coefficients of the deposit rate and the stock price in real M2 demand are insignificant at the 10% level. The likelihood ratio test in the extended Box–Cox model shows that the double-log form cannot be rejected at the 5% level while the linear form can be rejected at the 5% level. The CUSUM and CUSUMSQ tests show that the money demand function was relatively stable.      

A NOTE ON THE THEORY OF BLACK MARKETS UNDER PRICE CONTROLS

In a recent article in this Journal Browning and Culbertson (hereafter B-C) extended the theoretical investigation of the predicted effects of maximum price controls to the competitive firm and deduced an excess capacity result. In this note we extend their analysis to derive long-run adjustment paths for the industry for changes in market demand or control prices. The importance of such an extension is that the relevant industry adjustment path is different depending on whether one considers changes in the control price through such mechanisms as cost pass-throughs or through changes in industry demand. To make this extension meaningful, however, we must first consider the link between the firm and market diagrams in B-C's model. Section I is devoted to the analysis. Section II offers some concluding remarks.     

RETAIL REDLINING: ARE GASOLINE PRICES HIGHER IN POOR AND MINORITY NEIGHBORHOODS?

This study uses new data on retail gasoline prices in three cities to provide evidence on the relationship between neighborhood characteristics and consumer prices. We find that prices do not vary greatly with neighborhood racial composition, but that prices are higher in poor neighborhoods. For a 10% point increase in poor families relative to middle‐upper income families, retail gasoline prices increase by an average of 0.70%. Two‐thirds of this differential is explained by cost, competition, and demand characteristics of poor neighborhoods. The remaining differential likely reflects price discrimination in response to lower competition and/or more inelastic demand in poor neighborhoods. (JEL D43, J15, L71)     

The Russian Economy and the Oil Price: A Co-integrated VAR Approach

Using a co-integrated VAR model, this paper analyzes the dynamic effects of oil price and interest rate shocks on the Russian economy for the period 1995:Q1-2008:Q2. The co-integration analysis leads to the finding that a 1% increase in oil prices contributes to real GDP growth by 0.8%, suggesting an increase four times that reported by Rautava (2002), in the long run. Furthermore, the impulse response analysis suggests that the impacts of the shock on inflation and real GDP are positive over the next eight quarters (short run), whereas the tightening of monetary policy through interest rate channel is immediately associated with a decline in inflation as predicted by theory, but with an increase in real GDP over the preceding quarters.      

ESTIMATING A NEW KEYNESIAN PHILLIPS CURVE WITH A CORRECTED MEASURE OF REAL MARGINAL COST: EVIDENCE IN JAPAN

We estimate a New Keynesian Phillips curve (NKPC) in Japan, focusing on the measurement of real marginal cost (RMC). Especially, we correct labor share by taking account of two kinds of labor market frictions: (1) labor adjustment costs and (2) real wage rigidity. Our results show that the consideration of these labor market frictions greatly improves the fit of Japan's NKPC. Furthermore, if we additionally incorporate materials prices in the calculation of RMC then the fit of the NKPC is further improved. The conventional backward-looking component is no more needed to explain Japan's inflation dynamics if we use a corrected measure of RMC. (JEL E31)     

Hospital pricing: cost shifting and competition

The issue of cost shifting has taken on enormous policy implications. It is estimated that unsponsored and undercompensated hospital costs--one measure of cost shifting--has totaled $21.5 billion in 1991. The health services research literature indicates that hospitals set different prices for different payers. However, the empirical evidence on hospitals' ability to raise prices to one payer to make up for unsponsored care or lower payments by other payers is mixed at best. No study has concluded that hospitals have raised prices to fully adjust for such actions. The extent of cost shifting is limited by the market. When a hospital has market power, it is able to set prices above marginal costs. However, when a buyer has enough patient/subscribers and a willingness to direct them to particular providers based on price considerations, hospitals have less flexibility in raising prices above costs. Thus, the extent of cost shifting is limited by the market. Cost shifting is not as easy as it may have been in the past because the nature of hospital and insurer competition has changed radically in the last decade. While hospital quality, services, and amenities still matter, some buyers are increasingly concerned about the price they pay. Evidence from studies of PPO and HMO negotiations with hospitals suggests that hospitals' market power is eroding, at least in some areas. In areas with relatively few hospital competitors and little PPO or HMO activity, Medicaid and Medicare price reductions and uncompensated care burdens will be partially absorbed by higher prices paid by private payers. In more price sensitive markets and in markets in which prices to private payers have risen to those commensurate with the market power of local hospitals, such cost shifting will not occur. A market-based approach in hospital pricing requires an explicit policy for the uninsured. In a competitive market, a hospital that traditionally cared for the uninsured by spending some of its profits on them will be unable to do so, at least to the same extent as it did in the past. Increased competition in health care without consideration of the uninsured will decrease the uninsured's access to care.     

Consumers' subjective perception of price in times of inflation

This article suggests that inflation blurs the information content of prices, affecting consumers' subjective perception of prices. Preliminary evidence is provided by examining consumers' upper and lower price limits—concepts closely related to price quality perceptions—under extreme inflationary conditions taking place in Israel in 1980. The findings indicate that lower price limit distributions exhibit consistently greater dispersion across three income groups and the overall sample, compared to upper price limits. This effect is attributed to consumers' greater difficulties to provide lower price limits which are based solely on quality judgements, compared to upper limit responses which are partly anchored in more clearly defined budget constraints.     

THE SWINGS OF U.S. INFLATION AND THE GIBSON PARADOX

In recent business cycles, U.S. inflation has experienced a reduction of volatility and a severe weakening in the correlation to the nominal interest rate (Gibson paradox). We examine these facts in an estimated dynamic stochastic general equilibrium model with money. Our findings point at a flatter New Keynesian Phillips Curve (higher price stickiness) and a lower persistence of markup shocks as the main explanatory factors. In addition, a higher interest‐rate elasticity of money demand, an increasing role of demand‐side shocks, and a less systematic behavior of Fed's monetary policy also account for the recent patterns of U.S. inflation dynamics. (JEL E32, E47)     

The Impact of Oil Price Hike on the Belarusian Economy

This paper attempts to empirically examine the impact of oil price hike on the macro-economic activities in the Republic of Belarus. In order to capture both short-run and long-run dynamic effects, we use a co-integrated vector auto-regression (VAR) model with the data from the first quarter of 1996 to the second quarter of 2008. The analysis leads to the finding that a 1% increase in oil prices contributes to real GDP growth by 0.3% in the long run, whereas it has almost no effect in the short run (12 quarters). Additionally, it was found that exports and inflation rate are, respectively, positively and negatively related to the oil shock in the preceding period. In particular, the latter is significant.     

INFLATION AND THE ACCUMULATION OF ASSETS IN PRIVATE PENSION FUNDS*

The effect of inflation on asset accumulation in private pension funds is analyzed using a stock adjustment model which incorporates nonbehavioral saving. Nonbehavioral saving (such as capital gains) occurs with considerably lower adjustment cost than behavioral saving. The regressions using time series data suggest that inflation has a large negative effect on aggregate funded pension saving. This effect is apparently not due to a behavioral adjustment to changed relative rates of return, but is primarily due to capital losses. The effect is larger the higher the proportion of pension fund holdings in corporate equities.     

Expectations of inflation: The biasing effect of thoughts about specific prices

National surveys follow consumers’ expectations of future inflation, because these may directly affect the economic choices they make, indirectly affect macro-economic outcomes, and are considered in monetary policy. Yet, relatively little is known about how individuals form the inflation expectations they report on consumer surveys. Medians of reported inflation expectations tend to track official estimates of realized inflation, but show large heterogeneity between respondents, due to some expecting seemingly extreme inflation. We present two studies to examine whether individuals who consider specific price changes when forming their inflation expectations report more extreme and disagreeing inflation expectations due to focusing on specific extreme price changes. In Study 1, participants who were instructed to recall any price changes or to recall the largest price changes both thought of items for which price changes were perceived to have been extreme. Moreover, they reported more extreme year-ahead inflation expectations and showed more disagreement than did a third group that had been asked to recall the average change in price changes. Study 2 asked participants to report their year-ahead expectations of inflation, without first prompting them to recall specific price changes. Half of participants nevertheless thought of specific prices when generating their inflation expectations. Those who thought of specific prices reported more extreme and more disagreeing inflation expectations, because they were biased towards various items associated with more extreme perceived price changes. Our findings provide new insights into expectation formation processes and have implications for the design of survey-based measures of inflation.