Price inertia: money supply and price changes

Abstract

Price stickiness is incorporated in the partial information-localizedmarket framework of rational expectation models to show that the money stock has less than an equiproportionate effect on the aggregate price, and that the unanticipated monetary policy component has differing impacts on prices at the market level. The empirical analysis involves estimation of generated regressor models of money forecasting and price equations using the computationally intensive parametric bootstrap method developed most recently by Smith and McAleer. The results are unfavourable to the hypothesis of a one-to-one relationship between current money stock and prices, rather they lend distinct support to conclusions of a sluggish price adjustment model that money stock has less than equiproportionate effect on prices. Empirical results also show that the effects of unanticipated money growth on prices vary across markets.