TY  - JOUR
AU  - Ball,Laurence
AU  - Mankiw,N. Gregory
TI  - Relative-Price Changes as Aggregate Supply Shocks
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4168
PY  - 1995
Y2  - March 1995
UR  - http://www.nber.org/papers/w4168
L1  - http://www.nber.org/papers/w4168.pdf
N1  - Author contact info:
Laurence M. Ball
Department of Economics
Johns Hopkins University
Baltimore, MD 21218
Tel: 410/516-7605
Fax: 410/516-7600
E-Mail: lball@jhu.edu

N. Gregory Mankiw
Department of Economics
Littauer 223
Harvard University
Cambridge, MA  02138
Tel: 617/495-4301
Fax: 617/495-7730
E-Mail: ngmankiw@fas.harvard.edu
AB  - This paper proposes a theory of supply shocks, or shifts in the short-run Phillips curve, based on relative-price changes and frictions in nominal price adjustment. When price adjustment is costly, firms adjust to large shocks but not to small shocks, and so large shocks have disproportionate effects on the price level. Therefore, aggregate inflation depends on the distribution of relative-price changes: inflation rises when the distribution is skewed to the right, and falls when the distribution is skewed to the left. We show that this theoretical result explains a large fraction of movements in postwar U.S. inflation. Moreover, our model suggests measures of supply shocks that perform better than traditional measures, such as the relative prices of food and energy.
ER  -