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

Sartaj Rasool Rather (), S. Raja Sethu Durai () and M Ramachandran ()
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S. Raja Sethu Durai: Department of Economics, Pondicherry University, Puducherry

Working Papers from Madras School of Economics,Chennai,India

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.

Keywords: Inflation uncertainty; relative price dispersion; rolling cointegration; threshold inflation (search for similar items in EconPapers)
JEL-codes: E30 E31 E52 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2015-12
New Economics Papers: this item is included in nep-mon
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