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

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Author Info
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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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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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data

References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Juliane Scharff & Sven Schreiber, 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. [Downloadable!]
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