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2021 | OriginalPaper | Chapter

3. Price Determination in a Multi-Sector Global Economy

Author : John E. Silvia

Published in: Financial Markets and Economic Performance

Publisher: Springer International Publishing

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Abstract

Market prices during the 1970s illustrate how prices move from one perceived through a period of disequilibrium and then to a new equilibrium. Prices are seldom at equilibrium, partial equilibrium, and even more with the interactions of other markets, general equilibrium. In addition, price movements may exhibit a short-run cycle around a longer-run trend. In some cases, market price cannot move, or move too much, when we consider incomplete markets thereby generating price volatility. An administered price in one market (fixed exchange rates, central bank administered benchmark rates, or price-controls on commodity prices) may be inconsistent with the long-run equilibrium of that market or with other markets. Price “bubbles” reflect rational choices based upon currently perceived input information but maybe are inconsistent with future shocks and long-run fundamentals. These bubbles offer interesting cases for price discovery.

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previous chapter The Story of the Original Boom and Bust in Western Finance: The Mississippi Bubble

next chapter Credit Allocation and the Role of Interest Rates as the Price of Credit

C.W.J. Granger, “Investigating Causal Relationships by Econometric Models and Cross-Spectral Methods,” Econometrica, 1969, 37, no. 3: 424–438. An extensive discussion and application of the causality method is examined in Silvia et. al., Economic and Business Forecasting, Wiley, 2014.

Inflation inertia and periods of disinflation are associated with periods of below normal output. See Laurence Ball, “What Determines the Sacrifice Ratio?” In Monetary Policy, N. Gregory Mankiw, ed. Chicago: University of Chicago Press, 1994, pp. 155–182.

Michael Blumenthal in “When the President Calls,” Simon Bowmaker and Minouche Shafik, MIT Press, October 2019, p. 90.

“Higher Treasury Yields Send a Hopeful Signal to Markets,” Barron’s March 20, 2020.

For example, “During Covid-19 Pandemic, Biotech IPOs Already Surpass Record,” Wall Street Journal, August 10, 2020 and “WeWork/Luckin Coffee: When the Tide Goes Out,” Financial Times April 3, 2020.

Indiana Jones and the Raiders of the Lost Arc, Lucasfilms and Paramount Pictures, 1981.

See William H. Greene, Econometric Analysis, Sixth Edition, Pearson, Prentice-Hall, 2008, Chapter 22.

Jerry W. Markham, A Financial History of the United States: From the Age of Derivatives into the New Millennium: (1970–2001), volume 3, M.E. Sharpe, 2002.

“Small Businesses Feel Pressure from COVID-19 Pandemic, Fed Research Shows,” June 12, 2020, Federal Reserve Bank of Atlanta and New-York-Fed-Staff-Nowcast, various issues, Federal Reserve Bank of New York.

“Economic Outlook: A Perspective from the Markets and Prices,” John E. Silvia, presentation at the Banking Outlook Conference, Federal Reserve Bank of Atlanta, February 27, 2020.

Price adjustments can occur due to several economic factors. See Andrew Caplin and Daniel Spulber, “Menu Coats and the Neutrality of Money,” Quarterly Journal of Economics, 1987, 102 (November): 703–725.

Greg Ip, “The Debt Is Soaring; Debt Risks Are Not,” Wall Street Journal, April 24, 2020.

John M. Roberts, “An Estimate of the Long-Term Neutral Rate of Interest,” FEDS Notes Washington: Board of Governors of the Federal Reserve System, September 5, 2018, https://doi.org/10.17016/2380-7172.2227.

Alfred Marshall employed the allusion of the scissors to illustrate the effect of both demand and supply cutting to an equilibrium value in the market.

For a more complete treatment of this topic see “Adjustment Costs and the Theory of Supply,” Journal of Political Economy, 1967 (August), Lucas.

Rescue package October 23, 2019 reported in Financial Times that day.

Lawrence Katz and Alan Krueger, 1999 “The High-Pressure U.S. Labor Market of the 1990s,” Brookings Papers on Economic Activity, no. 1, 1–87. This article provides an argument for a lower natural rate of unemployment.

Chairman Jerome Powell, 60 Minutes interview May 18, 2020.

See our commentary “The Evolution of the Economy, Credit and Economic Policy,” Conference at the Federal Reserve Bank of Atlanta, Debate of Atlanta, Debate and Confirm: 2009 Banking Industry Outlook, February 19, 2009.

Robert Barro and Herschel Grossman, Money, Employment and Inflation, Cambridge University Press, 1976. A view of macroeconomics from the vantage point of addressing disequilibrium in the markets and how economic actors adjust to supply/income/credit constraints. A text I was privilege of studying with drafts from my professors.

William Branson, Macroeconomic Theory and Policy, Harper & Row, 1972. One of three essential macroeconomic texts that provide a framework for analysis. Branson brings in several chapters on international economics.

Robert Crouch, Macroeconomics, Harcourt Brace, 1972. A second macroeconomic text that provides a framework for analysis. In this text, the authors provides a framework to link commodity, money and bond markets and price determination between markets.

C.W.J. Granger, “Investigating Causal Relationships by Econometric Models and Cross-Spectral Methods,” Econometrica, 1969, 37, no. 3: 424–438. An extensive discussion and application of the causality method is examined in Silvia et al., Economic and Business Forecasting, Wiley, 2014.

William H. Greene, Econometric Analysis, Sixth Edition, Pearson, Prentice-Hall, 2008. A essential econometric text for advanced research.

Robert Lucas, “Adjustment Costs and the Theory of Supply,” Journal of Political Economy, 1967 (August). An excellent read on the adjustment costs of an economy in disequilibrium.

Jerry W. Markham, A Financial History of the United States, M.E. Sharpe. 2002. An excellent review of the financial history of the United States.

John M. Roberts, “An Estimate of the Long-Term Neutral Rate of Interest,” FEDS Notes. Board of Governors of the Federal Reserve System, Washington, September 5, 2018, https://doi.org/10.17016/2380-7172.2227.

David Romer, Advanced Macroeconomics, Third edition, McGraw-Hill, Irwin, 2006. A third macroeconomics text that provides a framework for analysis. The sections on dynamic adjustment, imperfect information, partial adjustment and profits/risks are essential reads.

John E Silvia, “The Evolution of the Economy, Credit and Economic Policy,” Conference at the Federal Reserve Bank of Atlanta, Debate of Atlanta, Debate and Confirm: 2009 Banking Industry Outlook, February 19, 2009. A look at the economy as signals of economic recovery began to appear.

John E Silvia, “Economic Outlook: A Perspective from the Markets and Prices,” Presentation at the Banking Outlook Conference, Federal Reserve Bank of Atlanta, February 27, 2020. A view of the U.S. economy just before the COVID breakout and shutdowns.

Title: Price Determination in a Multi-Sector Global Economy
Author: John E. Silvia
Publisher: Springer International Publishing
Book: Financial Markets and Economic Performance
Print ISBN: 978-3-030-76294-0

Electronic ISBN: 978-3-030-76295-7

Copyright Year: 2021
DOI: https://doi.org/10.1007/978-3-030-76295-7_3