The Effectiveness of Monetary Policy during Business Cycles Using Components of Producer and Consumer Price Indices

Karami Khoramabadi, Hooman; Erfani, Alireza; Tavakolian, Hosein

doi:10.22054/ijer.2021.58692.942

Document Type : Research Paper

Authors

¹ PhD Student, Economics, Semnan University, Semnan, Iran

² Professor, Economics, Semnan University, Semnan, Iran

³ Associate Professor, Economics, Allameh Tabataba'i University, Tehran, Iran

https://doi.org/10.22054/ijer.2021.58692.942

Abstract

This paper investigates the effectiveness of monetary policy in recession and expansion periods of business cycles in Iran. It uses the distribution of price changes over time using micro-data of producer and consumer price indices from March 2004 to March 2007 and March 1990 to March 2017. Results show that the observed distribution price changes at the producer and consumer levels change significantly over time. Whereas price flexibility (or, similarly, price stickiness) is closely related to the impact of monetary policy, the variable distribution of price changes over time suggests that the effectiveness of monetary policy should also change over time. We estimated the related parameters using the Ss model and the observed facts from the distribution of price changes, the price flexibility index, which shows how prices react to a monetary policy shock. The correlation coefficient and regression analysis results showed that the price flexibility index is counter-cyclical; this means that during periods of economic recession, the index of price flexibility increases. Therefore, the impact of monetary policy on real output decreases. However, during periods of economic expansion, the impact of monetary policy increases.

Keywords

20.1001.1.17260728.1401.27.92.2.4

Main Subjects

Monetary economy

Full Text

References

Alvarez, F., & Lippi, F. (2014). Price setting with menu cost for multiproduct firms. Econometrica, 82(1), 89-135.

Barro, R. J. (2013). Inflation and economic growth. Annals of Economics & Finance, 14(1).

Bayat S., Madanizadeh A. (2019). The threshold reaction of price setting behavior indexes to inflation rate changes: An application of price micro information to understand the changes of price rigidity degree. Quarterly Journal of Economic Policies and Research, 27 (90), 7-56. [In Persian]

Bayat, S., Jabal Ameli, P. (2019). Policy requirements under different macroeconomic conditions: An application of micro CPI data. Journal of Monetary and Banking Research, 12(39), 22-1. [In Persian]

Berger, D., & Vavra, J. (2018). Dynamics of the US price distribution. European Economic Review, 103, 60-82.

Bils, M., & Klenow, P. J. (2004). Some evidence on the importance of sticky prices. Journal of political economy, 112(5), 947-985.

Bloom, N., Floetotto, M., Jaimovich, N., Saporta‐Eksten, I., & Terry, S. J. (2018). Really uncertain business cycles. Econometrica, 86(3), 1031-1065.

Caballero, R. J., & Engel, E. (2006). Price stickiness in Ss models: basic properties. unpublished, MIT, October.

Caplin, A. S., & Spulber, D. F. (1987). Menu costs and the neutrality of money. The Quarterly Journal of Economics, 102(4), 703-725.

Cavallo, A. (2018). Scraped data and sticky prices. Review of Economics and Statistics, 100(1), 105-119.

Dhyne, E., Alvarez, L. J., Le Bihan, H., Veronese, G., Dias, D., Hoffmann, J., ... & Vilmunen, J. (2006). Price changes in the euro area and the United States: Some facts from individual consumer price data. Journal of Economic Perspectives, 20(2), 171-192.

Golosov, M., & Lucas Jr, R. E. (2007). Menu costs and Phillips curves. Journal of Political Economy, 115(2), 171-199.

Guvenen, F., Ozkan, S., & Song, J. (2014). The nature of countercyclical income risk. Journal of Political Economy, 122(3), 621-660.

Hall, R., Feldstein, M., Frankel, J., Gordon, R., Romer, C., Romer, D., & Zarnowitz, V. (2003). The NBER’s Business-Cycle Dating Procedure. Business Cycle Dating Committee, National Bureau of Economic Research.

Hemmaty, M., & Bayat, S. (2013). Price setting in Iran: Some stylized facts from CPI micro data. Journal of Money and Economy, 8(1), 75-108.

Jafari Samimi, A., Ehsani, M., tehranchian, A., Gholami, Z. (2017). The asymmetric impact of monetary policy and banking credits on business cycles in Iran: A threshold VAR approach. Journal of Econometric Modelling, 2(2), 9-33. doi: 10.22075/jem.2018.2877. [In Persian]

Karami Khoramabadi, H., erfani, A., Tavakoliyan, H. (2020). The investigation of price setting models compatible with the economy of Iran. Journal of Applied Economics Studies in Iran, 9(33), 1-29. doi: 10.22084/aes.2019.17976.2786. [In Persian]

Karami, H., Hematy, M. (2016). Evaluation of price setting models at retail level: Bayesian dynamic factor model approach. Iranian Journal of Economic Research, 20(65), 129-157. [In Persian]

Kehoe, P., & Midrigan, V. (2015). Prices are sticky after all. Journal of Monetary Economics, 75, 35-53.

Midrigan, V. (2010). Is firm pricing state or time dependent? Evidence from US manufacturing. The Review of Economics and Statistics, 92(3), 643-656.

Moreira, R. R., Monte, E. Z., & Abdala, A. (2018). Inflation targeting and inflation deviation inertia: a study for Brazil based on the fractional integration approach. Journal of Applied Economics, 21(1), 67-83.

Nakamura, E., & Steinsson, J. (2008). Five facts about prices: A reevaluation of menu cost models. The Quarterly Journal of Economics, 123(4), 1415-1464.

Nakamura, E., & Steinsson, J. (2010). Monetary non-neutrality in a multisector menu cost model. The Quarterly journal of Economics, 125(3), 961-1013.

Petrella, I., Santoro, E., & de la Porte Simonsen, L. (2018). Time-varying price flexibility and inflation dynamics. Discussion Paper 13027, CEPR.

Saedi, M. (2019). Price stickiness and the factors affecting it: Evidence from the Iranian economy. Master thesis, Faculty of economics and management, Sharif nniversity of technology. [In Persian]

Vavra, J. (2014). Inflation dynamics and time-varying volatility: New evidence and a ss interpretation. The Quarterly Journal of Economics, 129(1), 215-258.

Woodford, M., & Walsh, C. E. (2005). Interest and prices: Foundations of a theory of monetary policy. Macroeconomic Dynamics, 9(3), 462-468.

The Effectiveness of Monetary Policy during Business Cycles Using Components of Producer and Consumer Price Indices

Full Text

Full Text

References

References

Volume 27, Issue 92 - Serial Number 92October 2022Pages 45-75

Volume 27, Issue 92 - Serial Number 92
October 2022
Pages 45-75