A Flexible View on Prices

Nuno Alves

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: This paper argues that the flexible price paradigm is superior to the sticky price paradigm in the context of general equilibrium models. Based on a quarterly data set for six G7 economies, the paper presents two types of evidence showing that prices respond significantly to their underlying fundamentals. First, prices respond contemporaneously and significantly to technology shocks in all countries. Second, the cyclical correlation between prices and unit labor costs is highest contemporaneously and around 0.8 in all cases. This behavior is only consistent with a model where most firms set prices flexibly.

JEL-codes: E31 E32 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (1)

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