market share and price rigidity abstract survey evidence shows that the main reason why firms keep prices stable is that they are concerned about losing customers or market share we construct a general equilibrium model in which firms care about the size of their customer base firms and customers form long term relationships because consumers incur costs to switch sellers in an environment with sectoral productivity shocks we show that cost pass through is a non monotonic function of the size of switching costs specifically prices tend to become more stable as the fraction of repeat customers increases and the elasticity of the customer base falls

state dependent pricing and the dynamics of money and output standard macroeconomic models of price stickiness assume that each firm leaves its price unchanged for a fixed amount of time we present an alternative model in which the pricing decision depends on the state of the economy we find a method of aggregating individual price changes that allows a simple characterization of macroeconomic variables the model produces a positive money output correlation and an empirical phillips curve in addition the impact of monetary shocks depends crucially on the current level of output which points to a natural connection between state dependent microeconomics and state dependent macroeconomics i introduction there is a long tradition in macroeconomics of attributing the real effects of nominal demand shocks to nominal price stickiness in this view if there is no change in prices when nominal demand rises then quantities must bear the burden of adjustment hence nominal price rigidity provides the friction needed for nominal demand shocks to be transmitted to the real economy standard models of this transmission mechanism such as fischer 1977 and taylor 1980 are based on the assumption that each firm leaves its price unchanged for a fixed amount of time the main reason for considering such time dependent pricing rules is their analytic tractability constraining firms to adjust their prices at prespecified times both simplifies the derivation of equilibrium strategies and allows the use of powerful time series techniques to analyze aggregate dynamics the main disadvantage of the timedependent approach is that between price adjustments firms are not allowed to respond even to extreme changes of circumstance this makes it difficult to know whether the qualitative effects of money in these models are the result of nominal rigidities per se or of the exogenously imposed pattern of price changes an alternative approach to modeling price stickiness is to allow the price setting decision to depend on the actual state of the

how do budget deficits and economic growth affect reelection prospects evidence from a large panel of countries conventional wisdom is that good economic conditions and expansionary fiscal policy help incumbents get reelected but this has not been tested in a large cross section of countries we test these arguments in a sample of 74 countries over the period 1960 2003 we find no evidence that deficits help reelection in any group of countries developed and less developed new and old democracies countries with different government or electoral systems and countries with different levels of democracy in developed countries and in old democracies election year deficits actually reduce the probability that a leader is reelected with similar although smaller negative electoral effects of deficits in the earlier years of an incumbent s term in office higher growth rates of real gdp per capita raise the probability of reelection only in the less developed countries and in new democracies but voters are affected by growth over the leader s term in office rather than in the election year itself and apparently only by growth not attributed to global growth low inflation is rewarded by voters only in the developed countries the effects we find are not only statistically significant but also quite substantial quantitatively we also suggest how the absence of a positive electoral effect of deficits can be consistent with the political deficit cycle found in new democracies

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

product market competition and the industry price cost markup fluctuations abstract we examine the role played by imperfect competition in the response of markups to energy price and monetary changes we find i for concentrated industries markups increase with monetary expansion and decrease when energy prices increase the elasticity with respect to energy prices is greater than monetary changes ii for low concentration industries markups are virtually unaffected by monetary changes and the energy price elasticities are statistically insignificant iii markups are procyclical over the industry specific cycle and iv increased import competition lowers markups only in the concentrated industries the energy price increases decreases during the 1970s 1980s may have been a key factor contributing to the narrowing widening of the markup gap between high and low concentration industries we provide evidence that procyclical markups in concentrated industries are not being driven by differences in the degree of labor hoarding between low and high concentration industries

the timing and magnitude of retail store markdowns evidence from weekends and holidays we examine daily prices of eight goods at seventeen retail stores collected in ann arbor michigan over a four month period from november 1 to february 28 we focus on weekly and seasonal price patterns and on the frequency of price markdowns or sales there were frequent markdowns in the intensive shopping period prior to christmas and a tendency for such sales to occur on weekends we interpret these findings as evidence that a significant number of markdowns are timed to occur when shopping intensity is exogenously high we complement the imperfect information based motives for sales in the literature by contributing an additional element based on the role of bulk shopping and increasing returns in the shopping technology

can more frequent price changes lead to price inertia nonneutralities in a state dependent pricing context the authors present a generalized s s state dependent pricing model in which menus are changed not just in response to price misalignment but also in response to factors such as changing product mix their model generates aggregate price inertia and so reverses an important earlier result on neutrality in state dependent pricing contexts in more general settings than previous modifications it also provides a compromise between state and time dependent rules gives a glimpse at the dynamic implications of menu cost models and reproduces two recent results one on phillips curve slopes and one on asymmetric fluctuations copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

political business cycles 40 years after nordhaus the aim of this article is to survey the huge literature that has emerged in the last four decades following nordhaus s rev econ stud 42 2 169 190 1975 publication on political business cycles pbcs i first propose some developments in history of thought to examine the context in which this ground breaking contribution saw the light of the day i also present a simplified version of nordhaus s model to highlight his key results i detail some early critiques of this model and the fields of investigations to which they gave birth i then focus on the institutional context and examine its influence on pbcs the actual research agenda finally i derive some paths for future research

identifying price reviews by firms an econometric approach price reviews are a potentially costly activity a significant fraction of unchanged prices may stem from firms not reviewing prices rather than from obstacles to changing prices per se such as menu costs in this paper we disentangle these two causes of price stickiness by estimating an inflated ordered probit model on a panel of french manufacturing firms the results point to a low frequency of price reviews suggestive of the relevance of information costs as a determinant of the observed price stickiness in view of the inattentive producers literature pointing that the source of price rigidity matters this is suggestive of a large real effect of monetary policy

new insights into price setting behaviour in the uk introduction and survey results this article introduces the other contributions in this feature which use individual price data to investigate the extent of pricing rigidities in the uk it also reports the most relevant results of a new survey of the price setting behaviour that we have conducted for the uk including details about why prices are sticky the articles consider whether the microdata or survey results are consistent with particular theories of price setting our results suggest that there is heterogeneity in price setting behaviour which is ignored in typical representative agent models

evaluating microfoundations for aggregate price rigidities evidence from matched firm level data on product prices and unit labor cost a number of competing business cycle models have recently emerged all of which can explain why nominal shocks have real effects 1 although sharing a large number of common features a key difference between these models lies in the assumptions of how firms set prices and process information yet there exists very little direct micro evidence on the credibility of these assumptions this paper uses detailed data on product prices and unit labor cost merged at the firm level to evaluate competing sets of assumptions regarding firms price setting behavior thereby we provide firsthand evidence on the empirical relevance of the microfoundations of different dynamic stochastic general equilibrium dsge models

on the vote purchasing behavior of incumbent governments a couple of months before the swedish election in 1998 the incumbent government distributed 2 3 billion sek to 42 out of 115 applying municipalities this was the first wave of a four year long grant program intended to support local investment programs aimed at an ecological sustainable development this temporary grant program differs from traditional intergovernmental grants in several aspects most importantly in the sovereign decision making power given to the incumbent central government in this paper we investigate whether there were any tactical motives behind the distribution of these grants we find support for the hypothesis that the incumbent government used the grant program under study in order to win votes in particular we find strong support for the lindbeck weibull dixit londregan model in which parties distribute transfers to regions where there are many swing voters this result is statistically as well as economically significant we do however not find any support for the model that predicts that the incumbent government transfer money to its own supporters

identification versus misspecification in new keynesian monetary policy models abstract in this paper we study identification and misspecification problems in standard closed and open economy empirical new keynesian dsge models used in monetary policy analysis we find that problems with model misspecification still appear to be a first order issue in monetary dsge models and argue that it is problems with model misspecification that may benefit the most from moving from a classical to a bayesian framework we also argue that lack of identification should neither be ignored nor be assumed to affect all dsge models fortunately identification problems can be readily assessed on a case by case basis by applying recently developed pre tests of identification

profit margins and the business cycle evidence from uk manufacturing firms this paper presents some empirical models of profitability using panel data covering 709 large u k companies ove r the 1970s and 1980s focusing specifically on the role of aggregate demand shocks in shaping firm level profitability in basic regressi ons and in quite complex econometric models the results suggest that firm level profit margins fell heavily during the deep manufacturing recession of the early 1980s and as such are consistent with model s predicting the procyclical nature of profit margins this result hol ds across different product groups producer goods consumer durables a nd nondurables though the timing of the impact of aggregate shocks appears to differ copyright 1993 by blackwell publishing ltd

customer markets credit market imperfections and real price rigidity according to standard theory an increase in demand should raise prices of goods given factor prices empirically however prices appear to be unaffected by short run variations in demand this paper suggests an explanation of this observation if customers react slowly to price changes and credit markets are imperfect prices may be unchanged or even fall when demand increases the reason is that when demand is high profits are high and firms can compete more intensely for customers without increasing their borrowing copyright 1991 by the london school of economics and political science

microeconomic rigidities and aggregate price dynamics abstract this paper is an attempt to enrich the characterization of the sluggish behavior of the aggregate price level our contribution to this vast literature is to explicitly consider microeconomic heterogeneity and its interaction with nonlinear microeconomic price adjustment policies the model we propose outperforms the constant probability of adjustment partial adjustment model in describing the path of postwar u s inflation using only aggregate data we infer that the probability that a firm adjusts its price depends on the sign and the magnitude of the deviation of the price from its target level at the aggregate level we find that the aggregate price level responds less to negative shocks than to positive shocks that the size of this asymmetry increases with the size of the shock and that the number of firms changing their prices and therefore the flexibility of the price level to aggregate shocks varies endogenously over time in response to changes in economic conditions

why are prices sticky preliminary results from an interview study this paper reports preliminary results from a large research project on business pricing which is currently underway the idea is to use interviews with actual price setters to assess the validity of a dozen theories of price stickiness the rather unorthodox for economists methodology is defended the research design is described briefly and a few results based on the first 72 interviews out of a projected 200 are presented this sample suggests that the median firm changes its price annually and that price adjustments typically lag 3 4 months behind shocks to demand or cost this abstract was borrowed from another version of this item

separation of powers and political budget cycles political budget cycles pbcs arise when the electorate is imperfectly informed about the incumbent s competence and the incumbent has discretion over the budget focusing on the second condition we study how separation of powers affects pbcs in the composition of government spending we find that the details of the budget process namely the bargaining rules the status quo s location and the degree of compliance with the budget law are critical for the existence and the amplitudes of pbcs in particular when the status quo is determined by the previous budget and there is high compliance with the budget law separation of powers acts as a commitment device which solves the credibility problems that drive pbcs

electoral systems and public spending we study the effects of electoral institutions on the size and composition of public expenditure in oecd and latin american countries we emphasize the distinction between purchases of goods and services which are easier to target geographically and transfers which are easier to target across social groups we present a theoretical model in which voters anticipating government policymaking under different electoral systems have an incentive to elect representatives more prone to transfer public good spending in proportional majoritarian systems the model also predicts higher total primary spending in proportional majoritarian systems when the share of transfer spending is high low after dee ning rigorous measures of proportionality to be used in the empirical investigation we e nd considerable support for our predictions

testing static oligopoly models conduct and cost in the sugar industry 1890 1914 we explore the widespread methodology of using demand information to infer market conduct and unobserved cost components under the hypothesis of static oligopoly behavior direct measures of marginal cost and conduct indicating small market power serve as benchmarks the more competitive models yield better cost estimates the best cost estimates occur when conduct is estimated as a free parameter which in turn only slightly underestimates our direct measure it also tracks the decline in market power accompanying the industry s structural changes the methodology is largely validated although partial cost information can improve its predictive power conclusions are robust to demand function

menu costs and the neutrality of money a model of endogenous price adjustment under money growth is presented firms follow s s pricing policies and price revisions are imperfectly synchronized in the aggregate price stickiness disappears and money is neutral the connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated the results contrast with those obtained in models with exogenous fixed timing of price adjustment

housing collateral and the monetary transmission mechanism in this paper we quantify the effects of the recent increase in the housing loan to value ratio ltv on the monetary transmission mechanism we set up a two sector dynamic stochastic general equilibrium model with collateral constraints and production of goods and housing using bayesian methods we quantify the component of the monetary transmission mechanism that is generated by housing collateral we find that this component is substantial and strongly increasing in the ltv we conclude that in order to properly understand the monetary transmission mechanism we need to take into account the effects of housing related collateral constraints and their changing nature

legislative budget cycles recent literature suggests that electoral budget cycles are a phenomenon of new rather than established democracies what part of the democratization process explains the amelioration of the political budget cycle we argue the answer lies in part in the development of a strong party system we extend the classic rogoff siebert model to show that political budget cycles are possible in a legislative context with rational voters we then demonstrate that the development of a strong party system can restrain political budget cycles in a majoritarian electoral system finally we follow prior work in using vote share volatility as a measure of the institutionalization of the party system using newly collected vote share data for 433 elections for 90 democracies from 1980 2007 we calculate a measure of party institutionalization we then use this data to demonstrate that institutionalized party systems are associated with mitigated political budget cycles especially in majoritarian electoral systems

business cycles and the relationship between concentration and price cost margins using a newly constructed panel data base we examine changes in price cost margins in 284 manufacturing industries between 1958 and 1981 a key finding is a dramatic narrowing of the spread between the margins of concentrated and unconcentrated industries over this period we provide evidence that this narrowing is a result of the greater sensitivity of price cost margins in more concentrated industries to demand fluctuations this finding is robust to the inclusion of other industry variables and to measures of import competition the results indicate that cross sectional estimates of the concentration margins relationship are likely to be both biased and misleading

microdata evidence on the empirical importance of selection effects in menu cost models we use microdata on product prices linked to information on the producing firms that set them to study to what extent the timing of price changes reacts to changes in marginal cost this self selec

sticky prices in the euro area a summary of new micro evidence this paper summarises the vast evidence on micro price setting recently obtained for euro area countries we consider studies with micro data on consumer and producer prices as well as survey information the main findings are 1 prices in the euro area are sticky and stickier than in the us 2 downward price rigidity is only slightly more marked than upward price rigidity 3 heterogeneity and asymmetries are observed in price setting and 4 the relevance of theories that explain price stickiness such as implicit or explicit contracts marginal costs and coordination failure is confirmed whereas menu costs pricing thresholds and costly information explanations are judged much less relevant by firms jel c25 d40 e31

sticky prices new evidence from retail catalogs this paper presents new results on the size frequency and synchronization of price changes for twelve selected retail goods over the past 35 years three basic facts about the data are uncovered first nominal prices are typically fixed for more than one year although the time between changes is very irregular second prices change more often during periods of high overall inflation third when prices do change the sizes of the changes are widely dispersed both large and small changes occur for the same item and the sizes of these changes do not closely depend on overall inflation

attribution error in economic voting evidence from trade shocks this article exploits the international transmission of business cycles to examine the prevalence of attribution error in economic voting in a large panel of countries from 1990 to 2009 we find that voters on average exhibit a strong tendency to oust the incumbent governments during an economic downturn regardless of whether the recession is home grown or merely imported from trading partners however we find important heterogeneity in the extent of attribution error a split sample analysis shows that countries with more experienced voters more educated voters and possibly more informed voters all conditions that have been shown to mitigate other voter agency problems do better in distinguishing imported from domestic growth jel e3 e6

price adjustments by a gasoline retail chain we use daily data to examine price responses in the swedish gasoline market to changes in the rotterdam spot price exchange rates and taxes the distribution of price adjustments by a leading retail chain for the period january 1980 to december 1996 is symmetric with no small adjustments an error correction model shows that in the short run prices gradually move towards the long run equilibrium in response to cost shocks there is some evidence that also in the short run prices are stickier downwards than upwards prices respond more rapidly to exchange rate movements than to the spot market price our analysis emphasizes that to fully understand price adjustments it is necessary to examine data sets where the sample frequency at least matches that of price adjustments

capital market imperfections and countercyclical markups theory and evidence during recessions output prices seem to rise relative to wages and raw material prices one explanation is that imperfectly competitive firms compete less aggressively during recessions that is markups of price over marginal cost are countercyclical the authors present a model of countercyclical markups based on capital market imperfections during recessions liquidity constrained firms boost short run profits by raising prices to cut their investments in market share the authors provide evidence from the supermarket industry in support of this theory during regional and macroeconomic recessions more financially constrained supermarket chains raise their prices relative to less financially constrained chains copyright 1996 by american economic association

customer markets and the welfare effects of monetary policy a customer market model in which firms and customers form long term relations is developed and integrated into the canonical new keynesian framework this leads to two important differences compared to the standard model first the purely forward looking phillips curve is replaced by a hybrid variant where current inflation also depends on past inflation second the welfare cost of inflation is much lower which leads to an optimal monetary policy where relatively more weight is put on output gap stabilization than previously found in the literature

underemployment equilibrium with rational expectations in this paper i use some recent work in the microeconomics of imperfect information to construct a macro model the microeconomic theory suggests that atomistically competitive firms face kinked demand curves in this model there is a range of aggregate equilibria consistent with correct information i then show that individual firms can face a free rider problem in trying to move from one equilibrium to another by changing the price level monetary policy is not subject to this problem even if the policy is fully anticipated

search in the product market and the real business cycle empirical evidence suggests that most firms operate in imperfectly competitivemarkets we develop a search matching model between wholesalers and retailers firms face search costs and form long term relationships price bargain results in both wholesaler and retailer markups depending on firms relative bargaining power we simulate the model to explore the role of product market search frictions in business cycles we show that the way search costs are modelled is crucial to provide a realistic picture of firms business environment and improve the cyclical properties of an otherwise standard real business cycle model

staggering and synchronization in price setting evidence from multiproduct firms theoretical work on price setting behavior focuses on the single product case while in reality a single price setter sells many products the authors use retail store level multiproduct pricing data to learn about price dynamics they find that while the timing of a product s price changes is staggered across stores selling the same product the timing of the price changes of different products sold within the same store is highly synchronized this finding validates the usual assumption that decisions are staggered across price setters and suggests that price rigidity is due mostly to mechanical reasons and not to informational asymmetries copyright 1996 by american economic association

intermediate goods and business cycles implications for productivity and welfare this paper presents an aggregate demand driven model of business cycles that provides a new explanation for the procyclicality of productivity and simultaneously predicts large welfare losses from monetary nonneutrality the key features of the model are an input output production structure imperfect competition countercyclical markups and for some results state dependent price rigidity true technical efficiency is procyclical even though production takes place with constant returns without technology shocks or technological externalities the paper has observable implications that distinguish it empirically from related work these implications are generally supported by data from u s manufacturing industries copyright 1995 by american economic association

optimal pricing with costly adjustment evidence from retail grocery prices in many theoretical models it is assumed that there are costs associated with adjusting prices in this paper the existence type and magnitude of such costs are investigated empirically a discrete choice dynamic programming model that nests fixed and variable costs is developed and econometric estimates of the adjustment cost function are obtained the data used to implement the model consist of weekly retail prices and sales of three brands of saltine crackers sold by four chains of grocery stores in a small u s town the study has several distinguishing characteristics first the data are highly disaggregate at the level of brand and store second variables are sampled at weekly intervals third the model nests fixed and variable adjustment costs and can therefore determine their relative importance finally the discrete choice model is both structural and dynamic

westernization of asian diets and the transformation of food systems implications for research and policy abstract rapid economic and income growth urbanization and globalization are leading to a dramatic shift of asian diets away from staples and increasingly towards livestock and dairy products vegetables and fruit and fats and oils while the diversification of diets away from the traditional dominance of rice with rising incomes is expected and observed current food consumption patterns are showing signs of convergence towards a western diet the diet transition is characterized by increased consumption of wheat temperate fruit and vegetables and high protein and energy dense food globalization and the consequent global interconnectedness of the urban middle class is the driving force behind the convergence of diets the rapid spread of global supermarket chains and fast food restaurants is reinforcing the above trends the growing demand for diet diversity cannot be met solely by the traditional food supply chain it requires the modernisation of the food retail sector and the vertical integration of the food supply chain in effect linking the consumers plate to the farmers plow as a consequence asian agriculture is on an irreversible path leading away from its traditional pre occupation with cereal crop production especially rice towards a production system that is becoming increasingly commercialized and diversified this paper describes the determinants and trends in the diversification and westernization of asian diets implications of the evolving demand trends for food supply and retail systems are presented the paper discusses the prospects for small farmer participation in the emerging food supply system with a particular emphasis on asian rice production systems finally the paper considers emerging challenges for food policy small holder welfare and agricultural research and development priorities

transparency political polarization and political budget cycles in oecd countries we investigate the effects of fiscal transparency and political polarization on the prevalence of electoral cycles in fiscal balance while some recent political economy literature on electoral cycles identifies such cycles mainly in weak and recent democracies in contrast we show conditioning on a new index of institutional fiscal transparency that electoral cycles in fiscal balance are a feature of many advanced industrialized economies using a sample of 19 oecd countries in the 1990s we identify a persistent pattern of electoral cycles in low er transparency countries while no such cycles can be observed in high er transparency countries furthermore we find in accordance with recent theory that electoral cycles are larger in politically more polarized countries

the magnitude of menu costs direct evidence from large u s supermarket chains we use store level data to document the exact process of changing prices and to directly measure menu costs at five multistore supermarket chains we show that changing prices in these establishments is a complex process requiring dozens of steps and a nontrivial amount of resources the menu costs average 105 887 year per store comprising 0 70 percent of revenues 35 2 percent of net margins and 0 52 price change these menu costs may be forming a barrier to price changes specifically 1 a supermarket chain facing higher menu costs due to item pricing laws that require a separate price tag on each item changes prices two and one half times less frequently than the other four chains 2 within this chain the prices of products exempt from the law are changed over three times more frequently than the products subject to the law in principle fixed costs of changing prices can be observed and measured in practice such costs take disparate forms in different firms and we have no data on their magnitude so the theory can be tested at best indirectly at worst not at all alan blinder 1991 p 90

electoral goals and center state transfers a theoretical model and empirical evidence from india we construct a model of redistributive politics where the central government is opportunistic and uses its discretion to make transfers to state governments on the basis of political considerations these considerations are the alignment between the incumbent parties at the central and state levels and whether a state is a swing state or not a testable prediction from the model is that a state that is both swing and aligned with the central government is especially likely to receive higher transfers we test this prediction using indian data for 14 states from 1974 75 to 1996 97 we find that a state which is both aligned and swing in the last state election is estimated to receive 16 higher transfers than a state which is unaligned and non swing

a stable international monetary system emerges inflation targeting is bretton woods reversed a stable international monetary system has emerged since the early 1990s a large number of industrial and a growing number of developing countries now have domestic inflation targets administered by independent and transparent central banks these countries place few restrictions on capital mobility and allow their exchange rates to float the domestic focus of monetary policy in these countries does not have any obvious international cost inflation targeters have lower exchange rate volatility and less frequent sudden stops of capital flows than similar countries that do not target inflation inflation targeting countries also do not have current accounts or international reserves that look different from other countries this system was not planned and does not rely on international coordination there is no role for a center country the imf or gold it is durable in contrast to other monetary regimes no country has been forced to abandon an inflation targeting regime succinctly it is the diametric opposite of the post war system bretton woods reversed

aggregation and optimization with state dependent pricing the literature on the aggregation of s s policies has ignored the impact of aggregate behavior on the individual s optimization problem in the case of pricing the feedback effects are clear not only do pricing strategies determine the evolution of the price level but the evolution of the price level also influences the optimal pricing strategies in this paper we provide a consistent treatment of aggregation and optimization we use this model to analyze three issues in the menu cost pricing literature the relationship between strategic complementarity and the real effects of money the relationship between the variance of the money supply and the correlation between money and output and the relationship between the cost of price adjustment and the size of price adjustment questions concerning the dynamics of aggregate variables such as prices employment investment and consumption represent the core of business cycle analysis one striking feature of these variables is the radical difference between properties of these aggregates and the nature of the individual behavior that underlies them the behavior of a firm s prices investment and employment and the behavior of an individual s consumption all involve frictional elements that lead to discrete adjustment at the microeconomic level heterogeneity among individuals however tends to smooth the behavior of the corresponding aggregates in recent years a large body of research has developed to examine the manner in which microeconomic frictions influence aggregate dynamics one of the centerpieces of this research has been the s s model developed by arrow harris and marschak 1951 the key element of this model is the state dependence of individual decisions agents act when a state variable crosses some critical threshold which balances the cost and benefits of adjustment the aggregate implications of this form of microeconomic behavior have been analyzed by blinder 1981 caplin 1985 and mosser 1991 in the context of inventory dynamics by caplin and spulber 1987 caballero and engel 1991 1993 and caplin and leahy 1991 in the context of prices and by bertola and caballero 1990 caballero 1993 and eberly 1994 in the context of con sumer durables one of the most limiting aspects of these models is that they focus exclusively on the impact that microeconomic inertia has on aggregate dynamics they 1we would like to thank michael harrison loannis karatzas john leahy sr andreu mas colell a co editor and four anonymous referees for helpful discussions and comments and the national science foundation and the sloan foundation for financial support

the rigidity of prices this paper uses evidence on individual transaction prices to analyze price behavior the evidence shows that for many transactions pricesremain rigid for periods exceeding one year the rigidity of price ispositively correlated with industry concentration for several productsthe correlation of price changes across buyers is low the paper alsoinvestigates the relationship between price rigidity price change andthe length of time a buyer and seller have been doing business together the author interprets the evidence as emphasizing the importance of nonprice rationing and the inadequacy of models in whichprice movements alone clear markets copyright 1986 by american economic association

heterogeneity in price rigidity evidence from a case study using microlevel data we combine two data sets to study price rigidity the first consists of weekly time series of retail wholesale and spot prices for twelve products these time series contain two exogenous cost shocks we find that prices exhibit more rigidity in response to the second shock than the first the second data set consists of all publicly available information about the shocks content analysis of these information reveals that the first shock is larger and more persistent and the market has more information on it than the second we conclude therefore that prices are more flexible in response to cost shocks that are larger that are more persistent and on which market participants have more information

on the stubbornness of sticky prices this paper presents a simple menu cost example in which there is a clear distinction between price stickiness and downward rigidity of prices while price stickiness may or may not exist in menu cost models downward rigidity shows up whenever there is a reduction of the expected rate of inflation this reduction changes the optimal target and threshold for each firm for some it also implies an immediate increase of their own price this upward jump of prices in case of a disinflationary attempt is interpreted as downward rigidity since there are no symmetric forces when expected inflation increases copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

optimum pricing policy under stochastic inflation we describe aggregate inflation as a stochastic process in which the rate of change of the price level can be positive or zero where the times spent in each state are of random duration this class of processes includes two state markov chains and renewal processes as special cases it is shown that the optimal pricing policy of a monopolistic firm with non convex costs of price adjustment is s s in its real price i e its nominal price relative to the price level a basic certainty equivalence result is proved i e the firm behaves as if it faces a certain and fixed rate of inflation higher than the actual expected rate the difference between the two rates being a risk premium which depends on the real interest rate and the parameters of the stochastic process one can thus apply previous results from the case of certainty sheshinski and weiss review of economic studies 1977 to obtain comparative static results in particular one finds that an increase in the variance of expected inflation leads firms to choose a pricing policy with larger amplitude in real price the paper also addresses the question of consistency in firms expectations when the price level is determined by the firms actions in this paper we consider pricing policies of individual firms in an inflationary environment each firm expects the general price level to increase and must determine the rate of increase of its own price it is assumed that the firm incurs an adjustment cost when it changes its nominal price consequently firms choose to change prices occasionally rather than continuously

microfoundations of macroeconomic price adjustment survey evidence from swedish firms this paper presents the results of a survey on price setting behavior conducted on a large random sample of swedish firms the median firm adjusts the price once a year state and time dependent price setting are about equally important the four highest ranked explanations for price rigidity in this study implicit contracts sluggish costs explicit contracts and the kinked demand curve have close correspondents among the top five places in two similar large scale surveys carried out in the uk and the u s the results point to the importance of the long term relations with customers for the rigidity of prices the estimated share of sales that go to regular customers is more than 80

aggregate demand idle time and unemployment this paper develops a model of unemployment fluctuations the model keeps the architecture of the barro and grossman 1971 general disequilibrium model but replaces the disequilibrium framework on the labor and product markets by a matching framework on the product and labor markets both price and tightness adjust to equalize supply and demand there is one more variable than equilibrium condition on each market so we consider various price mechanisms to close the model from completely flexible to completely rigid with some price rigidity aggregate demand influences unemployment through a simple mechanism higher aggregate demand raises the probability that firms find customers which reduces idle time for firms employees and thus increases labor demand which in turn reduces unemployment we use the comparative statics predictions of the model together with empirical measures of quantities and tightnesses to re examine the origins of labor market fluctuations we conclude that 1 price and real wage are not fully flexible because product and labor market tightness fluctuate significantly 2 fluctuations are mostly caused by labor demand and not labor supply shocks because employment is positively correlated with labor market tightness and 3 labor demand shocks mostly reflect aggregate demand and not technology shocks because output is positively correlated with product market tightness

small menu costs and large business cycles a macroeconomic model of monopoly i introduction the conflict between modern neoclassical and traditional keynesian theories of the business cycle centers upon the pricing mechanism in neoclassical models prices are fully flexible they represent the continuous optimization of economic agents and the continuous intersection of supply and demand in keynesian models prices are often assumed to be sticky they do not necessarily equilibrate all markets at all times one of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this keynesian price stickiness this note shows that sticky prices can be both privately efficient and socially inefficient the business cycle results from the suboptimal adjustment of prices in response to a demand shock to the extent that policy can stabilize aggregate demand it can mitigate the social loss due to this suboptimal adjustment in some keynesian models prices are simply exogenously fixed 2 in others agents must set their prices in advance of the transaction date the act of altering a posted price is certainly costly these costs include such items as printing new catalogs and informing salesmen of the new price yet these menu costs are small and therefore generally perceived as providing only a weak foundation for these fixed price models however this inference is flawed small menu costs can cause large welfare losses the claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations

politics and business cycles in industrial democracies politics alberto alesina influences from political competition on macroeconomic policy are often thought to be a source of economic fluctuations politicians are described as being driven by two not mutually exclusive main motivations they want to be reelected and they harbour political or ideological biases when such theories are confronted with actual cycles in a number of industrial countries the pattern of inflation unemployment output and budget deficits indicates that partisan policy making is a fairly widespread phenomenon with more limited evidence that electoral preoccupations result in major fluctuations the combination of partisanship and electoral cycles may easily result in socially undesirable outcomes in particular the degree of politico institutional stability and the independence of the central bank have a bearing on macroeconomic outcomes these observations raise a number of important questions about the design of political institutions

insiders outsiders and nominal wage contracts while the consequences of nominal wage contracts have been rather thoroughly analyzed there is no generally accepted theory of why such contracts prevail in this paper i argue that the distinction between insiders and outsiders is important for understanding nominal wage contracts since most employment fluctuations take the form of fluctuations in hiring insiders are normally not affected by them since prices are primarily determined by costs demand shocks have small effects on real wages thus insiders have little incentive to change to more complicated contracts with rigid nominal wages nominal demand shocks have large effects on the employment opportunities of outsiders but outsiders have little influence on labor contracts

identifying the influences of nominal and real rigidities in aggregate price setting behavior we formulate a generalized price setting framework that incorporates staggered contracts of multiple durations and that enables us to directly identify the influences of nominal vs real rigidities we estimate this framework using macroeconomic data for germany 1975 1998 and for the u s 1983 2003 in each case we find that the data are well characterized by nominal contracts with an average duration of about two to three quarters we also find that new contracts exhibit very low sensitivity to marginal cost corresponding to a relatively high degree of real rigidity finally our results indicate that backward looking price setting behavior such as indexation to lagged inflation is not needed in explaining the aggregate data at least in an environment with a stable monetary policy regime and a transparent and credible inflation objective

opportunistic political cycles test in a young democracy setting this paper tests the theory of opportunistic cycles in a decade old democracy russia finds strong evidence of cycles and provides an explanation for why previous literature often found weaker evidence using regional monthly panel data we find that 1 the budget cycle is sizable and short lived public spending shifts toward direct monetary transfers to voters 2 the magnitude of the cycle decreases with democracy government transparency media freedom voter awareness and over time and 3 preelectoral manipulation increases incumbents chances for reelection the short length of the cycle explains underestimation of its size by previous literature because of low frequency data used in previous studies

the modern history of exchange rate arrangements a reinterpretation we develop a novel system of reclassifying historical exchange rate regimes one key difference between our study and previous classifications is that we employ monthly data on market determined parallel exchange rates going back to 1946 for 153 countries our approach differs from the imf official classification which we show to be only a little better than random it also differs radically from all previous attempts at historical reclassification our classification points to a rethinking of economic performance under alternative exchange rate regimes indeed the breakup of bretton woods had less impact on exchange rate regimes than is popularly believed

the impact of federal spending on house election outcomes while it is widely believed by academics politicians and the popular press that incumbent members of congress are rewarded by the electorate for bringing federal dollars to their district the empirical evidence supporting that claim is extremely weak one explanation for the failure to uncover the expected relationship between federal spending and election outcomes is that incumbents who expect to have difficulty being reelected are likely to exert greater effort in obtaining federal outlays since it is generally impossible to adequately measure this effort the estimated impact of spending is biased downward because of an omitted variable bias we address this estimation problem using instrumental variables for each house district we use spending outside the district but inside the state containing the district as an instrument for spending in the district federal spending is affected by a large number of actors e g governors senators mayors and other house members in the state delegation