Relative Prices as Aggregate Supply Shocks with Trend Inflation
This paper modifies the menu-cost model that Ball and Mankiw (1995) put forward to explain the correlation between the first- and higher-moments of the distribution of US price changes by allowing for non-zero trend inflation. Simulations suggest that even if trend inflation is only mildly positive - such as the 3 percent per annum experienced by the US in the last 50 years - the predictions of the Ball and Mankiw model are greatly altered. We then show that some of these predictions are rejected by annual post-WW2 US data.
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- Michael F. Bryan & Stephen G. Cecchetti, 1999.
"Inflation And The Distribution Of Price Changes,"
The Review of Economics and Statistics,
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- Nathan S. Balke & Mark A. Wynne, 1996. "Supply shocks and the distribution of price changes," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 10-18.
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