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Inflation And Price Dispersion In Equity Markets And In Goods And Services Markets

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  • David Parsley Helen Popper

Abstract

An empirical link between inflation and price dispersion has been well established in goods and services markets – both across time periods and across countries. However, the economic interpretation of this link has been typically frustrated by the observational equivalence of the predictions of the prominent theories. This prompts us to take a new approach. Specifically, we examine the link between inflation and price dispersion in an empirical setting patently lacking the market characteristics central to these theories (i.e., menu costs, or relative/aggregate confusion). In particular, we benchmark the inflation-dispersion link in goods and services markets with a matched panel of equity market prices. Surprisingly, we find that a link – comparable to that found in markets for goods and services – does exist in the equity market. Moreover, we find that our results are not due to a potentially important, but generally overlooked, bias that is present in many existing studies. Our results suggest that the debate over the factors responsible for the inflation/price dispersion link should be broadened to account for the asset market links we document.

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File URL: http://128.118.178.162/eps/mac/papers/0211/0211004.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0211004.

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Length: 35 pages
Date of creation: 11 Nov 2002
Date of revision:
Handle: RePEc:wpa:wuwpma:0211004

Note: Type of Document - pdf; prepared on IBM PC - PC-TEX/UNIX Sparc TeX; to print on HP/PostScript/Franciscan monk; pages: 35; figures: included/request from author/draw your own
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Keywords: relative price variability; stock markets; goods markets; inflation;

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References

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  1. 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.
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Cited by:
  1. Dieter Nautz & Juliane Scharff, 2005. "Inflation and Relative Price Variability in a Low Inflation Country: Empirical Evidence for Germany," German Economic Review, Verein für Socialpolitik, vol. 6(4), pages 507-523, November.

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