Research Discussion Papers, Bank of Finland
No 28/2004:
Stable price level and changing prices
Antti Suvanto ()
and Juhana Hukkinen ()
Abstract: The paper investigates the relationship between relative
price movements and changes in the aggregate price level using monthly data
on Finland’s Consumer Price Index and its components from the period
covering the past eight and a half years. This was a period of very low
inflation. The rate of growth in the aggregate price level was occasionally
very close to zero. The paper shows that declining nominal prices were a
rather common phenomenon during this period of low or no inflation. The
declining prices cannot, however, be explained by lack of demand or any
generalized deflationary tendencies. Hence, the downward rigidity of
nominal prices has not prevented relative price adjustments under price
stability. The paper develops a new method for looking at the composition
of inflation and illustrating how relative price dynamics interact with
changes in the aggregate price level. The correlation of relative price
variability and aggregate inflation has been negligible, but the
correlation between the skewness of price change distribution and aggregate
inflation is high. This is in accordance with the predictions of the menu
cost models. A significant proportion of the relative price changes appear
to have been persistent, suggesting the dominance of productivity and other
supply shocks.
Keywords: price level; inflation; deflation; prices; business cycles; (follow links to similar papers)
JEL-Codes: E30; E31; (follow links to similar papers)
35 pages, October 13, 2004
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