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Evidence on the effects of inflation on price dispersion under indexation

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  • Juliane Scharff
  • Sven Schreiber

Abstract

Distortionary effects of inflation on relative prices are the main argument for inflation stabilization in macro models with sticky prices. Under indexation of nonoptimized prices those models imply a nonlinear and dynamic impact of inflation on the cross-sectional price dispersion (relative-price variability, RPV). Using US sectoral prices we estimate (a generalized form of) the theoretical relationship between inflation and RPV. We confirm the impact of inflation fluctuations but find hitherto neglected endogeneity biases, and our IV and GMM estimates indicate that average (“trend”) inflation is significant for indexation. Lagged inflation is less important.
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Suggested Citation

  • 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.
    • Handle: RePEc:spr:empeco:v:43:y:2012:i:1:p:291-311
    DOI: 10.1007/s00181-011-0490-z
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    More about this item

    Keywords

    Relative price variability; Trend inflation; Endogeneity bias; E31 (inflation); E50 (general monetary policy);
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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