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Relative Prices as Aggregate Supply Shocks with Trend Inflation

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  • DAVID DEMERY
  • NIGEL W. DUCK

Abstract

Ball and Mankiw (1995) use a static menu-cost model to explain the historical behavior of the first and higher moments of commodity price changes in U.S. producer prices. We show that when appropriately modified for a world of positive trend inflation and forward-looking behavior by firms, the menu-cost model predicts a much weaker (possibly zero) correlation between the mean and the skewness of price changes than that found in the data. Copyright (c)2008 The Ohio State University.

Suggested Citation

  • David Demery & Nigel W. Duck, 2008. "Relative Prices as Aggregate Supply Shocks with Trend Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 389-408, March.
    • Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:2-3:p:389-408
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    Cited by:

    1. Michael Funke & Sebastian Weber & Jörg Döpke & Sean Holly, 2008. "The Cross-Section of Output and Inflation in a Dynamic Stochastic General Equilibrium Model with Sticky Prices," Quantitative Macroeconomics Working Papers 20809, Hamburg University, Department of Economics.
    2. Hayo, Bernd & Ono, Hiroyuki, 2015. "Explaining inflation in the period of quantitative easing in Japan: Relative-price changes, aggregate demand, and monetary policy," Journal of Asian Economics, Elsevier, vol. 36(C), pages 72-85.

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