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Inflation And The Distribution Of Price Changes

  • Michael F. Bryan
  • Stephen G. Cecchetti

This paper reconsiders the empirical evidence connecting inflation to its higher-order moments. In particular, we examine the statistical properties of the observed positive correlation between the sample mean and the sample cross-sectional skewness of price changes. This correlation has attracted substantial attention over the years and has recently been the focal point of a debate among macroeconomists. We show that the sample mean-skewness correlation suffers from a smallsample bias that accounts for the entirety of the observed correlation. In other words, we establish that one of the stylized facts in the literature on aggregate price behavior need not be a fact at all. © 1999 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/003465399558148
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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 81 (1999)
Issue (Month): 2 (May)
Pages: 188-196

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Handle: RePEc:tpr:restat:v:81:y:1999:i:2:p:188-196
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  1. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  2. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1, October.
  3. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
  4. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  5. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
  6. 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.
  7. Nathan S. Balke & Mark A. Wynne, 1996. "An equilibrium analysis of relative price changes and aggregate inflation," Working Papers 9609, Federal Reserve Bank of Dallas.
  8. Ball, Laurence & Mankiw, N Gregory, 1995. "Relative-Price Changes as Aggregate Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 161-93, February.
  9. Richard De Abreu Lourenco & David Gruen, 1995. "Price Stickiness and Inflation," RBA Research Discussion Papers rdp9502, Reserve Bank of Australia.
  10. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
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