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Inflation, relative prices and nominal rigidities

In: Monetary policy in a changing environment

  • Luc Aucremanne

    (National Bank of Belgium)

  • Guy Brys

    (University of Antwerp)

  • Peter J Rousseeuw

    (University of Antwerp)

  • Anja Struyf

    (University of Antwerp)

  • Mia Hubert

    (University of Leuven)

This paper examines the distribution of Belgian consumer prices and its interaction with aggregate inflation over the period June 1976-September 2000. Given the fat-tailed nature of this distribution, both classical and robust measures of location, scale and skewness are presented. We found a positive short-run impact of the skewness of relative prices on aggregate inflation, irrespective of the average inflation rate. The dispersion of relative prices has also a positive impact on aggregate inflation in the short run and this impact is significantly lower in the sub-sample starting in 1988 than in the pre-1988 sub-sample, suggesting that the prevailing monetary policy regime has a substantial effect on this coefficient. The chronic right skewness of the distribution, revealed by the robust measures, is positively cointegrated with aggregate inflation, suggesting that it is largely dependent on the inflationary process itself and would disappear at zero inflation. These results have three important implications for monetary policy. First, as to the transmission of monetary policy, our results are in line with the predictions of menu cost models and therefore suggest that this type of friction can be an important factor behind the short run non-neutrality of monetary policy. Second, as to the design of robust estimators of core inflation, economic arguments based on menu cost models tend to highlight the importance of the absence of bias. We have proposed an unbiased estimator by taking the time-varying degree of chronic right skewness explicitly into account. Third, as to the optimal rate of inflation, the chronic right skewness found in the data provides no argument against price stability, as it appears as an endogenous response of optimising price setters and would disappear when targeting a zero inflation rate. This conclusion contrasts sharply with the implications of the exogenously assumed downward rigidity of Tobin (1972), which would justify targeting a suf

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This chapter was published in:
  • Bank for International Settlements, 2003. "Monetary policy in a changing environment," BIS Papers, Bank for International Settlements, number 19.
  • This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 19-03.
    Handle: RePEc:bis:bisbpc:19-03
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    1. Carlos Robalo Marques & Pedro Duarte Neves & Luís Morais Sarmento, 2000. "Evaluating Core Inflation Indicators," Working Papers w200003, Banco de Portugal, Economics and Research Department.
    2. Richard De Abreu Lourenco & David Gruen, 1995. "Price Stickiness and Inflation," RBA Research Discussion Papers rdp9502, Reserve Bank of Australia.
    3. Jonathan Kearns, 1998. "The Distribution and Measurement of Inflation," RBA Research Discussion Papers rdp9810, Reserve Bank of Australia.
    4. Michael F. Bryan & Stephen G. Cecchetti, 1999. "Inflation And The Distribution Of Price Changes," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 188-196, May.
    5. Luis J. Álvarez & María de los Llanos Matea, 1999. "Underlying Inflation Measures in Spain," Banco de Espa�a Working Papers 9911, Banco de Espa�a.
    6. Stephen G. Cecchetti & Erica L. Groshen, 2000. "Understanding Inflation: Implications for Monetary Policy," NBER Working Papers 7482, National Bureau of Economic Research, Inc.
    7. Randal J. Verbrugge, 1999. "Cross-Sectional Inflation Asymmetries And Core Inflation: A Comment On Bryan And Cecchetti," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 199-202, May.
    8. 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.
    9. Torben M. Andersen, . "Nominal Rigidities and the Optimal Rate of Inflation," Economics Working Papers 2000-19, School of Economics and Management, University of Aarhus.
    10. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
    11. Meyler, Aidan, 1999. "A Statistical Measure Of Core Inflation," Research Technical Papers 2/RT/99, Central Bank of Ireland.
    12. Michael F. Bryan & Stephen G. Cecchetti, 1994. "Measuring Core Inflation," NBER Chapters, in: Monetary Policy, pages 195-219 National Bureau of Economic Research, Inc.
    13. Simon Hall & Anthony Yates, 1998. "Are there downward nominal rigidities in product markets?," Bank of England working papers 80, Bank of England.
    14. Anthony Yates, 1998. "Downward nominal rigidity and monetary policy," Bank of England working papers 82, Bank of England.
    15. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    16. 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.
    17. Vega, Juan Luis & Wynne, Mark A., 2001. "An evaluation of some measures of core inflation for the euro area," Working Paper Series 0053, European Central Bank.
    18. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    19. Stanley Fischer, 1981. "Relative Shocks, Relative Price Variability, and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 381-442.
    20. Peersman, Gert & Smets, Frank, 2001. "Are the effects of monetary policy in the euro area greater in recessions than in booms?," Working Paper Series 0052, European Central Bank.
    21. 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.
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