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Relative Prices as Aggregate Supply Shocks with Trend Inflation

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  • David Demery
  • Nigel W. Duck

Abstract

This paper modifies the menu-cost model that Ball and Mankiw (1995) put forward to explain the correlation between the first- and higher-moments of the distribution of US price changes by allowing for non-zero trend inflation. Simulations suggest that even if trend inflation is only mildly positive - such as the 3 percent per annum experienced by the US in the last 50 years - the predictions of the Ball and Mankiw model are greatly altered. We then show that some of these predictions are rejected by annual post-WW2 US data.

Suggested Citation

  • David Demery & Nigel W. Duck, 2005. "Relative Prices as Aggregate Supply Shocks with Trend Inflation," Bristol Economics Discussion Papers 05/570, School of Economics, University of Bristol, UK.
    • Handle: RePEc:bri:uobdis:05/570
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    References listed on IDEAS

    as
    1. Domberger, Simon, 1987. "Relative Price Variability and Inflation: A Disaggregated Analysis," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 547-566, June.
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    3. Ball, Laurence & Mankiw, N. Gregory, 1999. "Interpreting the Correlation Between Inflation and the Skewness of Relative Prices: A Comment on Bryan and Cecchetti," Scholarly Articles 3415439, Harvard University Department of Economics.
    4. Nathan S. Balke & Mark A. Wynne, 1996. "Supply shocks and the distribution of price changes," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 10-18.
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    6. Michael F. Bryan & Stephen G. Cecchetti, 1999. "Inflation And The Distribution Of Price Changes," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 188-196, May.
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    8. Vining, Daniel R, Jr & Elwertowski, Thomas C, 1976. "The Relationship between Relative Prices and the General Price Level," American Economic Review, American Economic Association, vol. 66(4), pages 699-708, September.
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    More about this item

    Keywords

    Inflation; menu-cost; relative price variance; relative price skewness; skew-normal.;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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