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Price Rigidity, Inflation and the Distribution of Relative Price Changes

Author

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  • Sartaj Rasool Rather

    (Madras School of Economics)

  • S. Raja Sethu Durai

    (Madras School of Economics)

  • M. Ramachandran

    (Department of Economics, Pondicherry University, Puducherry)

Abstract

This study examines whether skewness of the cross sectional distribution of relative price changes is positively associated with aggregate inflation as predicted by the Menu cost model of Ball and Mankiw (1994, 1995). Further, the study examines the size and frequency of price changes across various commodities and the distribution of relative price changes. The results from highly disaggregated Indian Wholesale Price Index data suggest that the skewness of relative price changes explains a significant proportion of short-run fluctuations in aggregate inflation. More importantly, the results indicate that the average size of price increases is greater than the size of price decreases implying downward rigidity in the prices of various commodities.

Suggested Citation

  • Sartaj Rasool Rather & S. Raja Sethu Durai & M. Ramachandran, 2015. "Price Rigidity, Inflation and the Distribution of Relative Price Changes," Working Papers 2015-114, Madras School of Economics,Chennai,India.
    • Handle: RePEc:mad:wpaper:2015-114
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    References listed on IDEAS

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    1. Rodrigo Cerda & Alvaro Silva & Rolf Lüders, 2021. "Price controls, hyperinflation, and the inflation–relative price variability relationship," Empirical Economics, Springer, vol. 61(4), pages 1725-1748, October.
    2. Santosh K. Sahu & Deepanjali Mehta, 2018. "Determinants Of Energy And Co2 Emission Intensities: A Study Of Manufacturing Firms In India," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 63(02), pages 389-407, March.

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    More about this item

    Keywords

    Inflation; Skewness; Relative price changes; Menu cost;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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