Price Rigidity, Inflation and the Distribution of Relative Price Changes

Sartaj Rasool Rather (), S. Raja Sethu Durai and M Ramachandran ()
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S. Raja Sethu Durai: Madras School of Economics

Working Papers from Madras School of Economics,Chennai,India

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.

Keywords: Inflation; Skewness; Relative price changes; Menu cost (search for similar items in EconPapers)
JEL-codes: E30 E31 E52 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2015-08
New Economics Papers: this item is included in nep-hme and nep-mac
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Citations: View citations in EconPapers (2)

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Journal Article: Price Rigidity, Inflation and the Distribution of Relative Price Changes (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:mad:wpaper:2015-114

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