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Evidence on the Functional Relationship between Relative Price Variability and Inflation with Implications for Monetary Policy

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  • DAVID FIELDING
  • PAUL MIZEN

Abstract

This paper considers the functional relationship between relative price variability (RPV) and inflation using quarterly personal consumer expenditure data in the US over 1967(I)-2003(I), deriving some implications for monetary policy. Non-parametric regression techniques are used to explore the shape of the RPV function, and this shape is related to the theory outlined by J. J. Rotemberg. The empirical RPV function yields a plausible 'optimal' value of inflation in the region of five percentage points, which is consistent with this theory and lies within the range of values cited by recent evaluations of 'sand' and 'grease' effects. Copyright (c) The London School of Economics and Political Science 2007.

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  • David Fielding & Paul Mizen, 2008. "Evidence on the Functional Relationship between Relative Price Variability and Inflation with Implications for Monetary Policy," Economica, London School of Economics and Political Science, vol. 75(300), pages 683-699, November.
  • Handle: RePEc:bla:econom:v:75:y:2008:i:300:p:683-699
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    Cited by:

    1. Baglan, Deniz & Ege Yazgan, M. & Yilmazkuday, Hakan, 2016. "Relative price variability and inflation: New evidence," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 263-282.
    2. Atif Mian & Amir Sufi, 2011. "Household Leverage and the Recession of 2007 to 2009," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 7, pages 125-173.
    3. Becker, Sascha S. & Nautz, Dieter, 2012. "Inflation, price dispersion and market integration through the lens of a monetary search model," European Economic Review, Elsevier, vol. 56(3), pages 624-634.
    4. Juliane Scharff & Sven Schreiber, 2012. "Evidence on the effects of inflation on price dispersion under indexation," Empirical Economics, Springer, vol. 43(1), pages 291-311, August.
    5. Choi, Chi-Young & Kim, Young Se, 2010. "Is there any asymmetry in the effect of inflation on relative price variability?," Economics Letters, Elsevier, vol. 108(2), pages 233-236, August.
    6. Dr. Gulnihal Aksoy & Prof. Dr. Don Bredin & Deirdre Corcoran & Stilianos Fountas, 2017. "Relative Price Dispersion and Inflation: Evidence for the UK and the US," Credit and Capital Markets, Credit and Capital Markets, vol. 50(1), pages 3-24.
    7. Rather, Sartaj Rasool & Durai, S. Raja Sethu & Ramachandran, M., 2014. "Inflation and relative price variability: Evidence for India," Journal of Asian Economics, Elsevier, vol. 30(C), pages 32-41.
    8. Muhammad Akmal, 2012. "The Relationship between Inflation and Relative Price Variability in Pakistan," SBP Working Paper Series 44, State Bank of Pakistan, Research Department.
    9. Muhammad Khan, 2013. "Inflation and Sectoral Output Growth Variability in Bulgaria," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 55(4), pages 687-704, December.
    10. Mª Ángeles Caraballo & Tilemahos Efthimiadis, 2012. "Divergent Optimal Inflation Rates In Euro Area Countries Or "Does One Size Fit All?"," EcoMod2012 3923, EcoMod.
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    12. Monir Uddin Ahmed & Md. Moniruzzaman Muzib & Md. Mahedi Hasan, 2016. "Inflation, inflation uncertainty and relative price variability in Bangladesh," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 6(3), pages 389-427, December.
    13. Muhammad Akmal, 2012. "The Relationship between Inflation and Relative Price Variability in Pakistan," Working Papers id:4734, eSocialSciences.
    14. Chi-Young Choi, 2010. "Reconsidering the Relationship between Inflation and Relative Price Variability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(5), pages 769-798, August.
    15. Saghir Pervaiz Ghauri & Rizwan Raheem Ahmed & Jolita Vveinhardt & Dalia Streimikiene, 2017. "Estimation of Relationship between Inflation and Relative Price Variability: Granger Causality and ARDL Modelling Approach," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 19(44), pages 249-249, February.
    16. Nebiye Yamak & Sinem Kocak & Fatma Kolcu, 2016. "Causal Relationship Between Relative Price Variability and Inflation in Turkey:Evidence from Panel Data," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 19(60), pages 183-198, June.

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