Comment on Relative Price Variability and Inflation in Reinganum's Consumer Search Model
AbstractThere is now a large empirical literature on the effect of the aggregate inflation rate on (i) the dispersion of prices across goods or locations (relative price variability, or RPV) and (ii) the dispersion of inflation rates across goods or locations (relative inflation variability, or RIV). In the early part of this literature, empirical modelling is explicitly based on theoretical macroeconomic models incorporating signal extraction problems. However, more recent empirical research is less directly connected to theory, and several authors report results that are inconsistent with signal extraction models. In particular, while RIV is increasing in the absolute value of inflation shocks, RPV is a negative monotonic function of inflation shocks. In this paper, we show that such a result is predicted by consumer search models in the style of Reinganum (1979). A proper understanding of the dynamics of price dispersion in 21st century economies will require a renewed interest in the theoretical foundations of empirical models.
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Bibliographic InfoPaper provided by University of Otago, Department of Economics in its series Working Papers with number 1305.
Length: 20 pages
Date of creation: Mar 2013
Date of revision: Mar 2013
Relative Price Variability; Inflation; Search models;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-27 (All new papers)
- NEP-MAC-2013-04-27 (Macroeconomics)
- NEP-MON-2013-04-27 (Monetary Economics)
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.:
- Jennifer F. Reinganum, 1978.
"A Simple Model of Equilibrium Price Dispersion,"
335, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Allen Head & Alok Kumar, 2004.
"Price Dispersion, Inflation and Welfare,"
NajEcon Working Paper Reviews
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- Benabou Roland, 1993.
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- David Fielding & Chris Hajzler & Jim MacGee, 2011. "Determinants of Relative Price Variability during a Recession: Evidence from Canada at the Time of the Great Depression," Working Papers 1107, University of Otago, Department of Economics, revised Aug 2011.
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