Working Paper: NBER ID: w1325
Authors: Olivier J. Blanchard; Angelo Melino
Abstract: This paper has a simple goal, that of understanding the joint behaviorof prices and quantities in a particular market. More precisely, it examines whether we can find decision problems for suppliers and buyers, together with a market equilibrium structure, which are consistent with the observed price and quantity time series. Because of the relative homogeneity of the product, of the size of the market, end of the quality of the data, the market chosen is the automobile market.The first conclusion we reach is that this goal is difficult to achieve.The behavior of prices appears inconsistent with simple -- competitive, monopolistically competitive or monopolistic -- market structures. Prices appear, in a well defined sense, to be too "sticky". We then consider potentiail explanations and extensions. None appears completely satisfactory. In particular, the introduction of costs of changing prices does not seem able to explain the joint behavior of prices and quantities.
Keywords: prices; quantities; automobile market; market equilibrium; economic fluctuations
JEL Codes: E31; L92
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| serial correlation in price equation residuals (C29) | model misspecification (C52) |
| exogenous and lagged state variables (C51) | current production (L69) |
| exogenous and lagged state variables (C51) | current sales (M31) |
| exogenous and lagged state variables (C51) | current prices (P22) |
| current production (L69) | prices (P22) |
| current sales (M31) | prices (P22) |
| current prices (P22) | current production (L69) |
| current prices (P22) | current sales (M31) |