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Inflation, relative prices and nominal rigidities

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  • Luc Aucremanne

    ()
    (National Bank of Belgium, Research Department)

  • Guy Brys

    (University of Antwerp, Department of Mathematics and Computer Science)

  • Mia Hubert

    (KULeuven, Department of Mathematics)

  • Peter J. Rousseeuw

    (University of Antwerp, Department of Mathematics and Computer Science)

  • Anja Struyf

    (University of Antwerp, Department of Mathematics and Computer Science)

Abstract

This paper examines the distribution of Belgian consumer prices and its interaction with aggregate inflation over the period June 1976-September 2000. Given the fat-tailed nature of this distribution, both classical and robust measures of location, scale and skewness are presented. We found a positive short-run impact of the skewness of relative prices on aggregate inflation, irrespective of the average inflation rate. The dispersion of relative prices has also a positive impact on aggregate inflation in the short run and this impact is significantly lower in the sub-sample starting in 1988 than in the pre-1988 sub-sample, suggesting that the prevailing monetary policy regime has a substantial effect on this coefficient. The chronic right skewness of the distribution, revealed by the robust measures, is positively cointegrated with aggregate inflation, suggesting that it is largely dependent on the inflationary process itself and would disappear at zero inflation. These results have three important implications for monetary policy. First, as to the transmission of monetary policy, our results are in line with the predictions of menu cost models and therefore suggest that this type of friction can be an important factor behind the short run non-neutrality of monetary policy. Second, as to the design of robust estimators of core inflation, economic arguments based on menu cost models tend to highlight the importance of the absence of bias. We have proposed an unbiased estimator by taking the time-varying degree of chronic right skewness explicitly into account. Third, as to the optimal rate of inflation, the chronic right skewness found in the data provides no argument against price stability, as it appears as an endogenous response of optimising price setters and would disappear when targeting a zero inflation rate. This conclusion contrasts sharply with the implications of the exogenously assumed downward rigidity of Tobin (1972), which would justify targeting a sufficiently positive inflation rate in order to facilitate the adjustment of relative prices. Our empirical findings contradict the latter type of downward rigidity which implies a negative correlation between skewness and inflation. Therefore, the cross-sectional properties of Belgian inflation data do not provide strong arguments against a price stability-oriented monetary policy, such as the one pursued by the Eurosystem.

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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 20.

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Length: 49 pages
Date of creation: May 2002
Date of revision:
Handle: RePEc:nbb:reswpp:200205-1

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  1. Scott Roger, 2000. "Relative Prices, Inflation and Core Inflation," IMF Working Papers 00/58, International Monetary Fund.
  2. Aucremanne, L., 2000. "The Use of Robust Estimators as Measures of Core Inflation," Papers 2, Warwick - Development Economics Research Centre.
  3. Luis J. Álvarez & María de los Llanos Matea, 1999. "Underlying Inflation Measures in Spain," Banco de Espa�a Working Papers 9911, Banco de Espa�a.
  4. 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.
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  7. Vega, Juan Luis & Wynne, Mark A., 2001. "An evaluation of some measures of core inflation for the euro area," Working Paper Series 0053, European Central Bank.
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  9. Ball, L. & Mankiw, G.H., 1992. "Relative-Price Change as Aggregate Supply Shocks," Harvard Institute of Economic Research Working Papers 1609, Harvard - Institute of Economic Research.
  10. Randal J. Verbrugge, 1999. "Cross-Sectional Inflation Asymmetries And Core Inflation: A Comment On Bryan And Cecchetti," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 199-202, May.
  11. Richard De Abreu Lourenco & David Gruen, 1995. "Price Stickiness and Inflation," RBA Research Discussion Papers rdp9502, Reserve Bank of Australia.
  12. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
  13. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
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  18. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
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  20. Pedro Duarte Neves & Luís Morais Sarmento & Carlos Robalo Marques, 1999. "Evaluating core inflation indicators," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  21. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  22. Luc Aucremanne, 2000. "The use of robust estimators as measures of core inflation," Working Paper Research 02, National Bank of Belgium.
  23. Jonathan Kearns, 1998. "The Distribution and Measurement of Inflation," RBA Research Discussion Papers rdp9810, Reserve Bank of Australia.
  24. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  25. Peersman, Gert & Smets, Frank, 2001. "Are the effects of monetary policy in the euro area greater in recessions than in booms?," Working Paper Series 0052, European Central Bank.
  26. Torben M. Andersen, . "Nominal Rigidities and the Optimal Rate of Inflation," Economics Working Papers 2000-19, School of Economics and Management, University of Aarhus.
  27. Scott Roger, 1997. "A robust measure of core inflation in New Zealand, 1949-96," Reserve Bank of New Zealand Discussion Paper Series G97/7, Reserve Bank of New Zealand.
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