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Inflation Dynamics and the Cross-Sectional Distribution of Prices in the E.U. Periphery

  • Dimitrios D. Thomakos

    ()

    (University of Peloponnese, Greece and The Rimini Centre for Economics Analysis, Italy.)

  • Constantina Kottaridi

    ()

    (University of Peloponnese, Greece)

  • Diego MŽndez-Carbajo

    ()

    (Illinois Wesleyan University, USA)

We explore the connection between inflation and its higher-order moments for three economies in the periphery of the European Union (E.U.), Greece, Portugal and Spain. Motivated by a micro-founded model of inflation determination, along the lines of the hybrid New Keynesian Phillips curve, we examine whether and how much does the cross-sectional skewness in producer prices affect the path of inflation. We develop our analysis with the perspective of economic integration/inflation harmonization (in the E.U.) and discuss the peculiarities of these three economies. We find evidence of a strong positive relation between aggregate inflation and the distribution of relative-price changes for all three countries. A potentially important implication of our results is that, if the cross-sectional skewness of prices is directly related to aggregate inflation, not only the direction but also the magnitude of a nominal shock would influence output and inflation dynamics. Moreover, the effect of such a shock could be received asymmetrically, even when countries share a common currency.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 43-07.

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Date of creation: Jul 2007
Date of revision: Jul 2007
Handle: RePEc:rim:rimwps:43-07
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