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Is Sticky Price Adjustment Important for Output Fluctuations?

John Keating and Isaac Kanyama ()

No 201301, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: We find that shocks with no immediate effect on the price level explain essentially all short-run variance of aggregate output while shocks that immediately affect price explain virtually none of that variance. Similar findings are obtained with aggregate, sectoral and industry-level data, both seasonally adjusted and not seasonally adjusted. With aggregate data, shocks that immediately raise the price level eventually cause output to fall while shocks that affect price with a lag immediately raise output and eventually cause the price level to rise. These responses combined with the variance decompositions suggest the short-run aggregate supply curve is nearly horizontal and the aggregate demand curve is nearly vertical. A statistical model that identifies shocks that don't affect prices for at least two months is also developed. Shocks with the slowest effect on prices explain essentially all of the short-run output variance in almost all cases. This robust finding is inconsistent with theories in which prices adjust rapidly to clear markets.

Keywords: sticky price adjustment; aggregate supply and demand; moving average representation; identification restrictions. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec
Date: 2013-01
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Journal Article: Is sticky price adjustment important for output fluctuations? (2015) Downloads
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