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Nonlinear impact of inflation on relative price variability

  • Caglayan, Mustafa
  • Filiztekin, Alpay

In this paper we investigate the link between inflation and relative price variability, and the impact of structural changes in the behavior of inflation using a half-a-century long disaggregated data. Employing panel data techniques to control for aggregate shocks, we show that: 1) the effect of inflation is non-neutral: relative price variability has increased in inflationary as well as deflationary periods, 2) the association between inflation and relative price variability is highly nonlinear 3) there is strong support for menu cost models, but none for signal extraction models.

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File URL: http://www.sciencedirect.com/science/article/B6V84-47MKR97-7/2/85900ad5c3c67fc2e0df456ca765b8b3
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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 79 (2003)
Issue (Month): 2 (May)
Pages: 213-218

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Handle: RePEc:eee:ecolet:v:79:y:2003:i:2:p:213-218
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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  1. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  2. Debelle, Guy & Lamont, Owen, 1997. "Relative Price Variability and Inflation: Evidence from U.S. Cities," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 132-52, February.
  3. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February.
  4. Vining, Daniel R, Jr & Elwertowski, Thomas C, 1976. "The Relationship between Relative Prices and the General Price Level," American Economic Review, American Economic Association, vol. 66(4), pages 699-708, September.
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