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Why Have U.S. Prices Become Independent of Business Cycles?

Gyun Cheol Gu ()

Metroeconomica, 2015, vol. 66, issue 4, 661-685

Abstract: type="main"> This article analyzes the issue of price cyclicality from a Post Keynesian perspective. It shows that there are two key factors at the center of the mechanism for the sudden U.S. transition from counter-cyclical to a-cyclical price movement in the early 1980s. First, the cost pass-through policy has been changed to ensure that the cyclical changes of input prices and/or labor productivity are absorbed more thoroughly and are thus reflected more frequently in profit markups than occurred prior to 1984. This relatively increased adaptability of the profit markups in the aggregate sense between the pricing periods cushions the direct effect of cyclical changes in the cost base on price cyclicality. Second, a structural change in the U.S. labor productivity's cyclical property has generated cost-base stability during the post-1984 period. Declines in hiring and firing costs and cutbacks in social security benefits have led the labor discipline effect to dominate the labor hoarding effect. This has allowed labor productivity to increase as the unemployment rate rises; thus, the cost base cyclicality has weakened, and prices have become less cyclical since 1984.

Date: 2015
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Handle: RePEc:bla:metroe:v:66:y:2015:i:4:p:661-685