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On the Granger Causality between Median Inflation and Price Dispersion

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  • Richard Ashley

Abstract

The Granger-causal relationship between the size and dispersion of fluctuations in sub-components of the U.S. Consumer Price Index (CPI) is examined using both in-sample and post- sample tests and data from January 1968 to December 2008. Strong in-sample evidence is found for feedback between median inflation and price dispersion; the evidence for Granger-causation from median inflation to price dispersion remains strong in out-of-sample testing, but is less strong for Granger-causation in the opposite direction. The implications of these results for the variety of price-level determination models in the literature are discussed.

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File URL: ftp://repec.econ.vt.edu/Papers/Ashley/price_dispersion_causality.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Virginia Polytechnic Institute and State University, Department of Economics in its series Working Papers with number e07-24.

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Length: 38 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:vpi:wpaper:e07-24

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Keywords: CPI; Granger; Causal Relationship; Price Dispersion; Inflation;

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  1. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, Econometric Society, vol. 66(1), pages 47-78, January.
  2. Gonçalves, Sílvia & Kilian, Lutz, 2002. "Bootstrapping autoregressions with conditional heteroskedasticity of unknown form," Working Paper Series, European Central Bank 0196, European Central Bank.
  3. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  4. Kenneth S. Rogoff & Vania Stavrakeva, 2008. "The Continuing Puzzle of Short Horizon Exchange Rate Forecasting," NBER Working Papers 14071, National Bureau of Economic Research, Inc.
  5. McCracken, Michael W., 2007. "Asymptotics for out of sample tests of Granger causality," Journal of Econometrics, Elsevier, Elsevier, vol. 140(2), pages 719-752, October.
  6. Ashley, Richard, 2003. "Statistically significant forecasting improvements: how much out-of-sample data is likely necessary?," International Journal of Forecasting, Elsevier, Elsevier, vol. 19(2), pages 229-239.
  7. Ashley, R & Granger, C W J & Schmalensee, R, 1980. "Advertising and Aggregate Consumption: An Analysis of Causality," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1149-67, July.
  8. 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, Elsevier, vol. 38(2), pages 391-405, October.
  9. Clark, Todd E. & West, Kenneth D., 2006. "Using out-of-sample mean squared prediction errors to test the martingale difference hypothesis," Journal of Econometrics, Elsevier, Elsevier, vol. 135(1-2), pages 155-186.
  10. Todd E. Clark & Michael W. McCracken, 2000. "Tests of Equal Forecast Accuracy and Encompassing for Nested Models," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0319, Econometric Society.
  11. Allen Head & Alok Kumar, 2005. "Price Dispersion, Inflation, And Welfare," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 533-572, 05.
  12. Debelle, Guy & Lamont, Owen, 1997. "Relative Price Variability and Inflation: Evidence from U.S. Cities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(1), pages 132-52, February.
  13. Ashley, Richard, 1998. "A new technique for postsample model selection and validation," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(5), pages 647-665, May.
  14. Brian Peterson & Shouyong Shi, 2006. "Money, Price Dispersion and Welfare," Working Papers, University of Toronto, Department of Economics tecipa-191, University of Toronto, Department of Economics.
  15. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, Elsevier, vol. 138(1), pages 291-311, May.
  16. 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, Blackwell Publishing, vol. 28(3), pages 323-41, August.
  17. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(2), pages 287-303, June.
  18. Richard De Abreu Lourenco & David Gruen, 1995. "Price Stickiness and Inflation," RBA Research Discussion Papers, Reserve Bank of Australia rdp9502, Reserve Bank of Australia.
  19. Ashley, Richard, 1981. "Inflation and the Distribution of Price Changes across Markets: A Causal Analysis," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 19(4), pages 650-60, October.
  20. Todd Clark & Michael McCracken, 2005. "Evaluating Direct Multistep Forecasts," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 24(4), pages 369-404.
  21. Sheshinski, Eytan & Weiss, Yoram, 1983. "Optimum Pricing Policy under Stochastic Inflation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(3), pages 513-29, July.
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Cited by:
  1. Richard A. Ashley & Kwok Ping Tsang, 2014. "Credible Granger-Causality Inference with Modest Sample Lengths: A Cross-Sample Validation Approach," Econometrics, MDPI, Open Access Journal, vol. 2(1), pages 72-91, March.

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