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Inflation Thresholds and Relative Price Variability: Evidence from U.S. Cities

  • Alexander Bick

    (Department of Money and Macroeconomics, Goethe University Frankfurt)

  • Dieter Nautz

    (Department of Money and Macroeconomics, Goethe University Frankfurt)

The impact of inflation on relative price variability (RPV) is an important channel for real effects of inflation. With a view to the recent debate on the Federal Reserve’s implicit lower and upper bounds of its inflation objective, we introduce a modified version of Hansen’s panel threshold model to explore the inflation-RPV linkage in U.S. cities. We find two significant inflation thresholds and both positive and negative effects of inflation on RPV. The smallest effect of inflation on RPV is ensured if inflation is low but well above zero. If monetary policy aims at minimizing inflation’s impact on relative prices, our estimates suggest that U.S. inflation should range between 1.8 percent and 2.8 percent.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 4 (2008)
Issue (Month): 3 (September)
Pages: 61-76

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Handle: RePEc:ijc:ijcjou:y:2008:q:3:a:3
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