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Inflation and Relative Price Variability in a Low Inflation Country: Empirical Evidence for Germany

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  • Nautz Dieter

    (Goethe University,Frankfurt, Germany)

  • Scharff Juliane

    (Goethe University,Frankfurt, Germany)

Abstract

The recent literature on the welfare cost of inflation emphasizes inflation’s effect on the variability of relative prices. Expected and unexpected inflation have both been proposed to increase relative price variability (RPV) and, thereby, to distort the information content of nominal prices. This paper presents new evidence on the impact of inflation on RPV in Germany. Our results indicate that the influence of expected inflation disappears if a credible monetary policy stabilizes inflationary expectations on a low level. Yet the significant impact of unexpected inflation suggests that even low inflation rates can lead to welfare losses by raising RPV above its efficient level.

Suggested Citation

  • Nautz Dieter & Scharff Juliane, 2005. "Inflation and Relative Price Variability in a Low Inflation Country: Empirical Evidence for Germany," German Economic Review, De Gruyter, vol. 6(4), pages 507-523, December.
    • Handle: RePEc:bpj:germec:v:6:y:2005:i:4:p:507-523
    DOI: 10.1111/j.1468-0475.2005.00144.x
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    Cited by:

    1. Dieter Nautz & Juliane Scharff, 2012. "Inflation and relative price variability in the euro area: evidence from a panel threshold model," Applied Economics, Taylor & Francis Journals, vol. 44(4), pages 449-460, February.
    2. Ciżkowicz, Piotr & Rzońca, Andrzej, 2010. "Inflation and corporate investment in selected OECD countries in the years 1960-2005 – an empirical analysis," MPRA Paper 29846, University Library of Munich, Germany.
    3. Linzert, Tobias, 2005. "The Unemployment Inflation Trade-Off in the Euro Area," IZA Discussion Papers 1699, Institute of Labor Economics (IZA).
    4. Muhammad Akmal, 2012. "The Relationship between Inflation and Relative Price Variability in Pakistan," Working Papers id:4734, eSocialSciences.
    5. M. Angeles Caraballo & Carlos Dabus & Carlos Usabiaga, 2006. "Relative prices and inflation: new evidence from different inflationary contexts," Applied Economics, Taylor & Francis Journals, vol. 38(16), pages 1931-1944.
    6. Cleomar Gomes da Silva & Gilberto O. Boaretto, 2018. "Inflation and Relative Price Variability in Brazil: A Time-Varying Parameter Approach," Economics Bulletin, AccessEcon, vol. 38(4), pages 1947-1956.
    7. 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.
    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. Alexander Bick & Dieter Nautz, 2008. "Inflation Thresholds and Relative Price Variability: Evidence from U.S. Cities," International Journal of Central Banking, International Journal of Central Banking, vol. 4(3), pages 61-76, September.
    10. 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.
    11. Hiranya K. Nath & Jayanta Sarkar, 2019. "Inflation and relative price variability: new evidence from survey-based measures of inflation expectations in Australia," Empirical Economics, Springer, vol. 56(6), pages 2001-2024, June.
    12. María Ángeles Caraballo & Carlos Dabús., 2008. "The Determinants of Relative Price Variability: Further Evidence from Argentina," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 45(132), pages 235-255.
    13. Ma Caraballo & Tilemahos Efthimiadis, 2012. "Is 2 % the optimal inflation rate for the Euro Area?," International Economics and Economic Policy, Springer, vol. 9(3), pages 235-243, September.
    14. 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.
    15. Mª Ángeles Caraballo Pou & Carlos Dabús & Diego Caramuta, 2006. "A Non-linear "Inflation-Relative Prices Variability" Relationship: Evidence from Latin America," Economic Working Papers at Centro de Estudios Andaluces E2006/09, Centro de Estudios Andaluces.
    16. Warmedinger, Thomas & Vetlov, Igor, 2006. "The German block of the ESCB multi-country model," Working Paper Series 654, European Central Bank.
    17. Muhammad Khan, 2016. "Evidence on the functional form of inflation and output growth variability relationship in European economies," International Economics, CEPII research center, issue 146, pages 1-11.

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