1996•Applied EconomicsRequires access
Differing degree of price flexibilities and the policy ineffectiveness proposition
Stephen Devadoss, David A. Hennessy
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Abstract
Price regulations impart stickiness to prices. The degree of response is analysed for three CPI subindex inflations - freely determined, regulated and mixed prices - and of aggregate CPI inflation to anticipated and unanticipated monetary policies. Freely determined prices and aggregate CPI show similar responses but faster and larger adjustments than regulated prices to anticipated monetary policies. The results imply that the extent to which monetary policies can influence prices depends on the degree of price inertia in various sectors. For monetary authorities to control inflation effectively, they need to focus on price movements in various sectors.