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)
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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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Paper provided by National Bank of Belgium in its series Research series with number
200205-1.
Length: 49 pages Date of creation: May 2002 Date of revision: Handle: RePEc:nbb:reswpp:200205-1
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Chapter
Luc Aucremanne & Guy Brys & Peter J Rousseeuw & Anja Struyf & Mia Hubert, 2003.
"Inflation, relative prices and nominal rigidities,"
BIS Papers chapters,
in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 81-105
Bank for International Settlements.
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References listed on IDEAS 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.:
Michael F. Bryan & Stephen G. Cecchetti & Rodney L. Wiggins II, 1997.
"Efficient Inflation Estimation,"
NBER Working Papers
6183, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
Michael F. Bryan & Stephen G. Cecchetti, 1994.
"Measuring Core Inflation,"
NBER Chapters,
in: Monetary Policy, pages 195-219
National Bureau of Economic Research, Inc.
[Downloadable!]
Other versions:
Michael F. Bryan & Stephen G. Cecchetti, 1993.
"Measuring Core Inflation,"
NBER Working Papers
4303, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
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