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Price dispersion and optimal inflation: The Spanish case



This paper studies the relation between inflation and relative price variability (RPV) in Spain during the 1987-2009 period. We find that this relation presents a U-shape profile, and that the optimal annual inflation rate (defined as the one that minimizes RPV) is around 4%, higher than the 2% inflation target proposed by the European Monetary Union. More importantly, this result does not depend on whether the monetary regime is before or after the euro. Hence, the main policy implication is that disinflation efforts to achieve the 2% inflation target result in welfare losses. The key link between inflation and RPV is unexpected inflation, whose optimal level is around zero. This suggests that monetary policy matters: the welfare costs associated with higher RPV can be minimized with a credible and predictable inflation targeting policy set at the appropriate level. An online appendix is available.

Suggested Citation

  • Mª Ángeles Caraballo & Carlos Dabús, 2013. "Price dispersion and optimal inflation: The Spanish case," Journal of Applied Economics, Universidad del CEMA, vol. 16, pages 49-70, May.
  • Handle: RePEc:cem:jaecon:v:16:y:2013:n:1:p:49-70

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    Cited by:

    1. Snežana Radukić & Milan Marković & Milica Radović, 2015. "The Effect of Food Prices on Inflation in the Republic of Serbia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 4(2), pages 23-36.
    2. Alejandro C. García-Cintado & Diego Romero-Ávila & Carlos Usabiaga, 2016. "The economic integration of Spain: a change in the inflation pattern," Latin American Economic Review, Springer;Centro de Investigaciòn y Docencia Económica (CIDE), vol. 25(1), pages 1-41, December.
    3. Piotr Nowaczyk & Joanna Hernik, 2020. "Adopting the Euro will Cause an Increase in Prices: A Study on Inflationary Processes in Euro Area Member States," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 377-403.

    More about this item


    inflation expectations; inflation uncertainty; monetary policy; optimal inflation; relative price variability; semiparametric estimation. :;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation


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