The Asymmetric Adjustment of Prices: Theory and Evidence from UK Manufacturing

R. Arden, Sean Holly and Paul Turner ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper provides some empirical evidence of asymmetric price adjustment. There have been a number of models put forward recently by Tsiddon and Ball and Mankiw in which it is optimal for the firm to respond asymmetrically to cost and demand shocks. In this paper this hypothesis is investigated using UK data on manufacturing product prices. Some evidence is provided to support the hypothesis and it is found that if prices - conditional on demand and cost conditions - are below what they should be, firms raise their prices more quickly than when prices are above what they should be. When there is trend inflation there is less incentive to cut prices when it is costly, because there is a high probability that subsequent shocks will require a rise in prices. It is also found that this asymmetry diminishes as the inflation rate falls. At just below 2% inflation, the asymmetry disappears. Moreover, below this rate of inflation the asymmetry is reversed. Firms now lower their prices when they are too high more quickly than they raise them when they are too low.

Date: 1997-07
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:9715

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