A macroeconomic analysis of sectoral price movements in the United States

Analyses of both the business and inflation cycles remain the dominant concerns in macroeconomics since no single theory has yet consistently explained these two phenomena. It is generally agreed however that the assumed degree of short run variability in prices and quantities constitutes the principal differences between the competing theories. In this thesis we offer a theoretical and empirical analysis of this variability in order to provide additional data and insight by which to judge competing versions of the New Keynesian, New Classical, and Real Business Cycle theories.This analysis examines the determinants of nominal and relative price variability and empirically tests for the levels of price variability across industrial sectors and over the business cycle in the United States during the period 1947 to 1989. Differences across sectors allows sources of nominal and real rigidity and flexibility to be identified, and consequently an examination of distributional effects which arise from industry pricing behavior.The first issue addressed in this thesis is the microfoundations including various arguments concerning the potential sources of price rigidity. Input-output, menu cost, and markup rule approaches and their implications for firms in various industries are considered. An multi-sector macroeconomic model, which is an extension of that presented by Shupp (1984), is also developed in which the behavior of economic variables across sectors can be analyzed. This method produces an alternative approach to studying the macroeconomy in which both microfoundation analysis and aggregative methods are fully amenable. A performance index is employed within an optimal control systems framework in order to determine and evaluate the effects of different policy instruments in light of the existing model parameters.The empirical analysis divides the U.S. economy into 21 different industrial sectors in an attempt to measure the degree of nominal and relative price variability across these sectors and over the business cycle. Modified versions of Gordon's (1990) and Rotemberg's (1982) specifications are derived for each industry. Empirical results for the multi-sector model are then obtained and the three results compared.U of I OnlyETDs are only available to UIUC Users without author permissio