Relative price variability: Evidence from supply and demand events |
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Authors: | Lawrence S. Davidson R.W. Hafer |
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Affiliation: | Indiana University, Bloomington, IN 47405, USA;Federal Reserve Bank of St. Louis, MO 63166, USA |
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Abstract: | Previous studies of relative price variability assume that all supply changes are unanticipated or that supply elasticities are equal across markets. In this paper, we extend these models by relaxing these restrictive assumptions. Our resulting theoretical expression for relative price dispersion reveals an independent role for unanticipated and anticipated supply events. Subjecting our model to empirical testing, we find that this dichotomy of supply shocks is not rejected by the data for the period 1970–1981. |
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