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Relative Price Distortions and Inflation Persistence

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  • Tatiana Damjanovic
  • Charles Nolan

Abstract

Sticky-price models often suggest that relative price distortion is a major cost of inflation. We provide an intuition for this: Even at low rates, inflation strongly affects price dispersion which in turn has an impact on the economy qualitatively similar to, and of the order of magnitude of, a negative shift in productivity. The utility cost of price dispersion is quantified and its impact on optimal monetary policy discussed. Price dispersion is incorporated into a linearised model. Strikingly, a contractionary nominal shock has a persistent, negative hump-shaped impact on inflation but may have a positive hump-shaped impact on output. Copyright � The Author(s). Journal compilation � Royal Economic Society 2009.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 120 (2010)
Issue (Month): 547 (09)
Pages: 1080-1099

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Handle: RePEc:ecj:econjl:v:120:y:2010:i:547:p:1080-1099

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  1. Richard Mash, 2006. "Optimising Microfoundations for Inflation Persistence," Computing in Economics and Finance 2006 457, Society for Computational Economics.
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  5. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
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  9. Tack Yun, 2005. "Optimal Monetary Policy with Relative Price Distortions," American Economic Review, American Economic Association, vol. 95(1), pages 89-109, March.
  10. Peter N. Ireland, 1997. "Stopping inflations, big and small," Proceedings, Federal Reserve Bank of Cleveland, pages 759-782.
  11. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
  12. Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Price Dispersion In The Small And In The Large: Evidence From An Internet Price Comparison Site," Journal of Industrial Economics, Wiley Blackwell, vol. 52(4), pages 463-496, December.
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Cited by:
  1. Damjanovic, Tatiana & Damjanovic, Vladislav & Nolan, Charles, 2008. "Unconditionally optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 491-500, April.
  2. Tatiana Damjanovic & Charles Nolan, 2009. "Second Order Accurate Approximation to the Rotemberg Model Around a Distorted Steady State," CDMA Working Paper Series 200907, Centre for Dynamic Macroeconomic Analysis, revised 15 Apr 2010.
  3. Guido Ascari & Argia M. Sbordone, 2013. "The macroeconomics of trend inflation," Staff Reports 628, Federal Reserve Bank of New York.
  4. Stéphane Auray & Aurélien Eyquem, 2012. "Welfare Reversal in Monetary Union," Working Papers 2012-33, Centre de Recherche en Economie et Statistique.
  5. Damjanovic, Tatiana & Nolan, Charles, 2008. "Seigniorage-maximizing inflation," SIRE Discussion Papers 2008-35, Scottish Institute for Research in Economics (SIRE).
  6. Mohammad Ali Kafaie & Amir Mohammad Moshref, 2013. "Inflation and Relative Price Dispersion: Evidence for Iran," Iranian Economic Review, Economics faculty of Tehran university, vol. 18(1), pages 93-104, winter.

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