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

Constantina Kottaridi, Diego Mendez-Carbajo and Dimitrios Thomakos

No 4, Working Papers from University of Peloponnese, Department of Economics

Abstract: We explore the connection between inflation and its higherorder 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.

Keywords: Cross-sectional distribution of prices; Greece, Portugal, Spain, European Union, Harmonization. (search for similar items in EconPapers)
Pages: 36 pages
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Related works:
Chapter: Inflation Dynamics and the Cross-Sectional Distribution of Prices in the E.U. Periphery (2009)
Working Paper: Inflation Dynamics and the Cross-Sectional Distribution of Prices in the E.U. Periphery (2007)
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