Differing Degrees of Price Flexibilities and the Policy Ineffectiveness Proposition

Stephen Devadoss and David A. Hennessy

Staff General Research Papers from Iowa State University, Department of Economics

Abstract: Price regulations impart stickiness to prices. The degree of response is analysed for three CPI sub-index inflations - freely determined, regulated and mixed prices - and of aggregate CPI inflation to anticipated and unanticipated monetary policies. Freely determined prices and aggregate CPI show similar responses but faster and larger adjustments than regulated prices to anticipated monetary policies. The results imply that the extent to which monetary policies can influence prices depends on the degree of price inertia in various sectors. For monetary authorities to control inflation effectively, they need to focus on price movements in various sectors.

Date: 1996-09-01
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Published in Applied Economics, September 1996, vol. 28, pp. 1059-1065

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