its higher order moments, and in particular, its third moment the skewness of the price change distribution. Evidence on correlations between inflation and its moments goesback over thirty years, and was first used to reject the independence of relative price changes and inflation that is assumed in neo- classical models. More recently, New Keynesian macroeconomists have shown that the strong positive correlation between inflation and the skewness of the price change distribution is consistent with menu-cost models of price setting behavior. This is a fairly controversial result, prompting other researchers to demonstrate that the same correlation can be found in a multi- sector, flexible-price (real business cycle) model. We examine the small-sample properties of the main empirical finding on which this work is based: the positive correlation between the sample mean and sample skewness of price change distributions. Our results show that this particular statistic suffers from a large positive small-sample bias, and demonstrate that the entirety of the observed correlation can be explained by this bias. To the extent that we find any relationship at all, it is that the correlation is negative. In other words, we establish that one of the most accepted stylized facts in the literature on aggregate price behavior, that inflation and the skewness of the price change distribution are positively linked, need not be a fact at all.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
5793.
Length: Date of creation: Oct 1996 Date of revision: Handle: RePEc:nbr:nberwo:5793
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Find related papers by JEL classification: E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
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, 1994.
"Measuring Core Inflation,"
NBER Chapters,
in: Monetary Policy, pages 195-219
National Bureau of Economic Research, Inc.
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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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