NBER Working Papers by Phillip Cagan

The effects of inflation adjustments of corporate earnings on market prices were tested by cross section regressions of 485 manufacturing companies for the period 1966-76 and subperiods. The basic data were company reports and stock prices. For the full period, market prices reflected the inventory valuation adjustment and the decline in real value of net financial liabilities fairly completely, but they reflected the adjustment for the understatement of depreciation to only a small extent. The surprisingly low effect of the depreciation adjustment could only be partly attributed to measurement error, but not entirely. The estimated effect of capital gains on stock prices was either in the wrong direction or negligible. The implication of the results is that market investors use a range of...

The purpose of the present study is to measure the amount of price increase that the proposals for accommodation required in 1973—74. Presumably such an estimate of the amount could be made in time to act on it. Whether accommodation is a desirable policy is not addressed here. Consistently followed, it would result in a higher long-run rate of inflation, because there are not likely to be nearly enough episodes of deflationary accommodation to offset the inflationary ones. Notwithstanding the appeal in the short run to accept inflationary fait accompli in order to avoid prolonged economic slack, one may have strong reservations about the long-run consequences on expectations of following such a policy.

The present study examines the recession behavior of wholesale prices since World War II and compares it with the 1920s as the most recent period of earlier recessions with comparable severity. The focus is on changes in recession behavior, possible bias in the data, and differences in behavior between various groups of wholesale prices. (Differences between wholesale and consumer prices, though of importance, are not examined here.) The purpose is to extend the evidence on the degree and uniformity of the change in price behavior and to test various interpretations of those changes.

A variety of theories have been offered to explain why prices generally respond so little to declines in demand, and do so now less than formerly. Most of these center around a dependence of prices on costs, or the anticipated trend of costs, and a greater disregard for short-run changes in demand. The more appealing hypothesis is the simple one that price setters tend to adjust slowly to changes in market conditions; they transmit but do not originate inflation. To find that prices in the less competitive markets respond more slowly to changes in market conditions - first lagging, then catching up - would support the theory that firms try to avoid frequent changes in prices but vary in their ability to do so. Are lags in price adjustment related to market structure? Previous empiric...