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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.

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:wly:jmoncb:v:40:y:2008:i:2-3:p:389-408
    DOI: 10.1111/j.1538-4616.2008.00118.x
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    References listed on IDEAS

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