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Evidence on the effects of inflation on price dispersion under indexation

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Author Info
Juliane Scharff (Halle Institute for Economic Research (IWH))
Sven Schreiber () (Goethe University Frankfurt, and Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation,)
Abstract

Distortionary effects of inflation on relative prices are the main argument for inflation stabilization in macro models with sticky prices. Under indexation of non-optimized prices those models imply a nonlinear and dynamic impact of inflation on the cross-sectional price dispersion (relative-price variability, RPV). Using US sectoral prices we estimate (a generalized form of) the theoretical relationship between inflation and RPV. We confirm the impact of inflation fluctuations but find hitherto neglected endogeneity biases, and our IV and GMM estimates indicate that average ("trend") inflation is significant for indexation. Lagged inflation is less important.

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Publisher Info
Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 12-2008.

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Length: 29 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:imk:wpaper:12-2008

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Related research
Keywords: relative price variability; trend inflation; endogeneity bias;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

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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. Alexander Bick & Dieter Nautz, 2008. "Inflation Thresholds and Relative Price Variability: Evidence from U.S. Cities," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 61-76, September. [Downloadable!]
  2. Fielding, David & Mizen, Paul, 2000. "Relative Price Variability and Inflation in Europe," Economica, London School of Economics and Political Science, vol. 67(265), pages 57-78, February. [Downloadable!] (restricted)
  3. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February. [Downloadable!] (restricted)
  4. Mark Bils & Peter J. Klenow & Oleksiy Kryvtsov, 2003. "Sticky prices and monetary policy shocks," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-9. [Downloadable!]
  5. Bomberger, William A & Makinen, Gail E, 1993. "Inflation and Relative Price Variability: Parks' Study Reexamined," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 854-61, November. [Downloadable!] (restricted)
  6. Parsley, David C, 1996. "Inflation and Relative Price Variability in the Short and Long Run: New Evidence from the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 323-41, August. [Downloadable!] (restricted)
  7. Nath, Hiranya K., 2004. "Inflation and relative price variability: short-run vs. long-run," Economics Letters, Elsevier, vol. 82(3), pages 363-369, March. [Downloadable!] (restricted)
  8. Guido Ascari, 2004. "Staggered prices and trend inflation: some nuisances," Macroeconomics 0404029, EconWPA. [Downloadable!]
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  9. Reinsdorf, Marshall, 1994. "New Evidence on the Relation between Inflation and Price Dispersion," American Economic Review, American Economic Association, vol. 84(3), pages 720-31, June. [Downloadable!] (restricted)
  10. Mick Silver & Christos Ioannidis, 2001. "Intercountry Differences in the Relationship between Relative Price Variability and Average Prices," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 355-374, April. [Downloadable!] (restricted)
  11. Grier, Kevin B. & Perry, Mark J., 1996. "Inflation, inflation uncertainty, and relative price dispersion: Evidence from bivariate GARCH-M models," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 391-405, October. [Downloadable!] (restricted)
  12. Dieter Nautz & Juliane Scharff, 2005. "Inflation and Relative Price Variability in a Low Inflation Country: Empirical Evidence for Germany," German Economic Review, Blackwell Publishing, vol. 6(4), pages 507-523, November. [Downloadable!] (restricted)
  13. Balke, Nathan S. & Wynne, Mark A., 2007. "The relative price effects of monetary shocks," Journal of Macroeconomics, Elsevier, vol. 29(1), pages 19-36, March. [Downloadable!] (restricted)
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  14. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    Other versions:
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