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Relative Price Distortions and Inflation Persistence

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  • Tatiana Damjanovic
  • Charles Nolan

Abstract

Sticky-price models often suggest that relative price distortion is a major cost of inflation. We provide an intuition for this: Even at low rates, inflation strongly affects price dispersion which in turn has an impact on the economy qualitatively similar to, and of the order of magnitude of, a negative shift in productivity. The utility cost of price dispersion is quantified and its impact on optimal monetary policy discussed. Price dispersion is incorporated into a linearised model. Strikingly, a contractionary nominal shock has a persistent, negative hump-shaped impact on inflation but may have a positive hump-shaped impact on output. Copyright © The Author(s). Journal compilation © Royal Economic Society 2009.

Suggested Citation

  • Tatiana Damjanovic & Charles Nolan, 2010. "Relative Price Distortions and Inflation Persistence," Economic Journal, Royal Economic Society, vol. 120(547), pages 1080-1099, September.
  • Handle: RePEc:ecj:econjl:v:120:y:2010:i:547:p:1080-1099
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    References listed on IDEAS

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    Cited by:

    1. Leith, Campbell & Liu, Ding, 2016. "The inflation bias under Calvo and Rotemberg pricing," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 283-297.
    2. Mohammad Ali Kafaie & Amir Mohammad Moshref, 2013. "Inflation and Relative Price Dispersion: Evidence for Iran," Iranian Economic Review, Economics faculty of Tehran university, vol. 18(1), pages 93-104, winter.
    3. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2015. "Ordering Policy Rules with an Unconditional Welfare Measure," International Journal of Central Banking, International Journal of Central Banking, vol. 11(1), pages 103-149, January.
    4. Guido Ascari & Argia M. Sbordone, 2014. "The Macroeconomics of Trend Inflation," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 679-739, September.
    5. Damjanovic, Tatiana & Damjanovic, Vladislav & Nolan, Charles, 2008. "Unconditionally optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 491-500, April.
    6. Tatiana Damjanovic & Charles Nolan, 2008. "Seigniorage-maximizing inflation," CDMA Working Paper Series 200807, Centre for Dynamic Macroeconomic Analysis.
    7. repec:bis:bisifc:46-13 is not listed on IDEAS
    8. Luca Onorante & Matija Lozej & Ansgar Rannenberg, 2017. "Countercyclical capital regulation in a small open economy DSGE model," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Data needs and Statistics compilation for macroprudential analysis, volume 46 Bank for International Settlements.
    9. Kurozumi, Takushi & Van Zandweghe, Willem, 2016. "Price Dispersion and Inflation Persistence," Research Working Paper RWP 16-9, Federal Reserve Bank of Kansas City.
    10. David Fielding & Christopher Hajzler & James MacGee, 2017. "Price-Level Dispersion versus Inflation-Rate Dispersion: Evidence from Three Countries," Staff Working Papers 17-3, Bank of Canada.
    11. Stéphane Auray & Aurélien Eyquem, 2012. "Welfare Reversal in Monetary Union," Working Papers 2012-33, Center for Research in Economics and Statistics.
    12. Tatiana Damjanovic & Charles Nolan, 2009. "Second Order Accurate Approximation to the Rotemberg Model Around a Distorted Steady State," CDMA Working Paper Series 200907, Centre for Dynamic Macroeconomic Analysis, revised 15 Apr 2010.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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