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Evidence on the effects of inflation on price dispersion under indexation

  • Sven Schreiber

    ()

    (IMK at the Hans Boeckler Foundation)

  • Juliane Scharff

    ()

    (Halle Institute for Economic Research (IWH))

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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Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 12-2008.

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Length: 29 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:imk:wpaper:12-2008
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  2. Ball, Laurence & Gregory Mankiw, N. & Reis, Ricardo, 2005. "Monetary policy for inattentive economies," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 703-725, May.
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  15. 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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