Tuesday, March 3, 2009

Chart of the Day

Well, maybe there's a touch of deflation there.

Chart is taken from macroblog, who construct a sticky price goods CPI and a flexible price goods CPI, as plotted. The data on stickiness are taken from the Bils/Klenow study (Bils being Rochester's top-ranked professor).

Stickiness is a difficult thing to measure, though, and I can't comment on the exact methodology because I have exams tomorrow and the day after. However, consider the case of glossy magazines, the cover price of which changes very infrequently. We might be tempted to conclude they are a sticky-price good. But that doesn't reflect how often the prices of advertisements (the main source of revenue) in the magazine change - much more frequently than the cover price does, so looking at the CPI data will overstate the stickiness.

It's also interesting to note how the author of the macroblog post prefaces with a mention that stickiness is considered close to the heart of the matter of business cycles, and absent it, things would go much more smoothly - but there are lots and lots of famous economists out there now saying that we can't let prices adjust.

We had a brief introduction to sticky price models today in macro as well. What timing.

POSTSCIPT: Today, Krugman has a post entitled "All your downside are belong to us".

For those of you not in the know, this is a a play on a terrible translation of a twenty year old Japanese video game which became a popular catchphrase on the internet many years ago.

I can't help but wonder how such memetics come to the attention of Nobel Prize winners. Or is this phrase really so popular?

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