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Relative Price Skewness and Inflation: A Structural VAR Framework

  • Attila Rátfai

    ()

    (Central European University)

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    This study evaluates the empirical significance of idiosyncratic pricing shocks in inflation dynamics. To this end, using store-level price data for a selected group of products and employing identification schemes dictated by (S,s) pricing theory, product-level Structural Vector Autoregressions comprised of inflation and relative price skewness are estimated. Robustly to alternative identification assumptions, definitions of the relative price and measures of asymmetry in relative price distributions, idiosyncratic shocks tend to explain about 25 to 30 percent of the forecast error variance in inflation rates at the 12-month horizon. They also lead to substantial build-up in inflation after about 3 to 5 months following the initial disturbance.

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    File URL: http://econ.core.hu/doc/dp/dp/mtdp0103.pdf
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    Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0103.

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    Length: 52 pages
    Date of creation: Mar 2001
    Date of revision:
    Handle: RePEc:has:discpr:0103
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    1. Anil K Kashyap, 1994. "Sticky Prices: New Evidence from Retail Catalogs," NBER Working Papers 4855, National Bureau of Economic Research, Inc.
    2. David E. Runkle, 1987. "Vector autoregressions and reality," Staff Report 107, Federal Reserve Bank of Minneapolis.
    3. Michael F. Bryan & Stephen G. Cecchetti, 1996. "Inflation and the Distribution of Price Changes," NBER Working Papers 5793, National Bureau of Economic Research, Inc.
    4. Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, vol. 104(423), pages 247-61, March.
    5. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche 9421, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    6. Ball, L. & Mankiw, G.H., 1992. "Relative-Price Change as Aggregate Supply Shocks," Harvard Institute of Economic Research Working Papers 1609, Harvard - Institute of Economic Research.
    7. 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.
    8. Runkle, David E, 1987. "Vector Autoregressions and Reality," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(4), pages 437-42, October.
    9. Mariano Tommasi, 1992. "Inflation and Relative Prices Evidence from Argentina," UCLA Economics Working Papers 661, UCLA Department of Economics.
    10. 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.
    11. Blejer, Mario I, 1983. "On the Anatomy of Inflation: The Variability of Relative Commodity Prices in Argentina," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(4), pages 469-82, November.
    12. Tsiddon, Daniel, 1993. "The (Mis)Behaviour of the Aggregate Price Level," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 889-902, October.
    13. Parsley, David C, 1996. "Inflation and Relative Price Variability in the Short and Long Run: New Evidence from the United States," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 323-41, August.
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