Asymmetric Impact of Relative Price Shocks in Presence of Trend Inflation

Sartaj Rasool Rather ()

Working Papers from Madras School of Economics,Chennai,India

Abstract: This study examines whether skewness of cross sectional distribution of relative price shocks has asymmetric impact on aggregate inflation. The empirical evidence from various countries suggests that the positively skewed shocks have different impact from that of negatively skewed shocks on aggregate inflation. Consistent with the predictions of menu cost models, the empirical results indicate that this asymmetry in the impact of relative price shocks mainly depends on the nature of trend that inflation exhibits for a given period. The crucial inference that emerges from the empirical findings is that the traditional approach of using a linear regression model, to examine the relationship between inflation and skewness during the period with trend inflation, is not appropriate as it may result in misspecification and misleading conclusions.

Keywords: Inflation; distribution of relative price shocks; menu costs; asymmetry (search for similar items in EconPapers)
JEL-codes: E30 E31 E52 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2016-08
New Economics Papers: this item is included in nep-mac
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Journal Article: Asymmetric impact of relative price shocks in presence of trend inflation (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:mad:wpaper:2016-153

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