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Inflation Thresholds and Relative Price Variability: Evidence from U.S. Cities

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  • Alexander Bick

    (Department of Money and Macroeconomics, Goethe University Frankfurt)

  • Dieter Nautz

    (Department of Money and Macroeconomics, Goethe University Frankfurt)

Abstract

The impact of inflation on relative price variability (RPV) is an important channel for real effects of inflation. With a view to the recent debate on the Federal Reserve’s implicit lower and upper bounds of its inflation objective, we introduce a modified version of Hansen’s panel threshold model to explore the inflation-RPV linkage in U.S. cities. We find two significant inflation thresholds and both positive and negative effects of inflation on RPV. The smallest effect of inflation on RPV is ensured if inflation is low but well above zero. If monetary policy aims at minimizing inflation’s impact on relative prices, our estimates suggest that U.S. inflation should range between 1.8 percent and 2.8 percent.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 4 (2008)
Issue (Month): 3 (September)
Pages: 61-76

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Handle: RePEc:ijc:ijcjou:y:2008:q:3:a:3

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Cited by:
  1. Sascha S. Becker, 2011. "What Drives the Relationship Between Inflation and Price Dispersion? Market Power vs. Price Rigidity," SFB 649 Discussion Papers SFB649DP2011-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Sascha S. Becker & Dieter Nautz, 2010. "Inflation, Price Dispersion and Market Integration through the Lens of a Monetary Search Model," SFB 649 Discussion Papers SFB649DP2010-058, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Kremer, Stephanie & Bick, Alexander & Nautz, Dieter, 2009. "Inflation and growth: new evidence from a dynamic panel threshold analysis," Discussion Papers 2009/9, Free University Berlin, School of Business & Economics.
  4. Sven Schreiber & Juliane Scharff, 2008. "Evidence on the effects of inflation on price dispersion under indexation," IMK Working Paper 12-2008, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

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