Relative price and inflation variability in a simple consumer search model

Christopher Hajzler and David Fielding

Economics Letters, 2014, vol. 123, issue 1, 17-22

Abstract: There is a large empirical literature on the effect of aggregate inflation on both price-level dispersion (relative price variability, RPV) and inflation rate dispersion (relative inflation variability, RIV) across goods or locations. Early empirical work of RIV has an explicit theoretical foundation in signal-extraction models. However, recent empirical work on RPV has produced results inconsistent with signal-extraction models. In particular, while RIV is increasing in the absolute value of inflation shocks, RPV is a negative monotonic function of inflation shocks. We show that consumer search theory offers a potential explanation for these apparently contradictory observations.

Keywords: Relative price variability; Inflation; Search models (search for similar items in EconPapers)
JEL-codes: E3 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:123:y:2014:i:1:p:17-22

DOI: 10.1016/j.econlet.2014.01.018

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