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Inflation and the Dispersion of Component Price Indices: A Case for Four Percent Solution

Author

Listed:
  • Sartaj Rasool Rather

    (Madras School of Economics)

  • S. Raja Sethu Durai

    () (Department of Economics, Pondicherry University, Puducherry)

  • M. Ramachandran

    () (Department of Economics, Pondicherry University, Puducherry)

Abstract

Unlike earlier literature that documented positive association between inflation and the dispersion of relative prices over time, the empirical evidence from this study suggests that the relative price dispersion increases in response to the deviation of inflation from certain threshold/target level in either direction rather than the inflation per se. More importantly, the inflation rate at which the dispersion of relative prices is minimized turn out to be 4 percent for US and Japan; hence, supporting the proposal of 4 percent inflation target for both the countries.

Suggested Citation

  • Sartaj Rasool Rather & S. Raja Sethu Durai & M. Ramachandran, 2015. "Inflation and the Dispersion of Component Price Indices: A Case for Four Percent Solution," Working Papers 2015-134, Madras School of Economics,Chennai,India.
  • Handle: RePEc:mad:wpaper:2015-134
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Inflation uncertainty; relative price dispersion; rolling cointegration; threshold inflation;

    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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