Price Rigidity, Inflation and the Distribution of Relative Price Changes

Sartaj Rasool Rather (), S. Raja Sethu Durai and M Ramachandran ()

South Asian Journal of Macroeconomics and Public Finance, 2015, vol. 4, issue 2, 258-287

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 (WPI) 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 downwards rigidity in the prices of various commodities. JEL Classification: E30, E31, E52

Keywords: Inflation; skewness; relative price changes; menu cost (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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Working Paper: Price Rigidity, Inflation and the Distribution of Relative Price Changes (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:sae:smppub:v:4:y:2015:i:2:p:258-287

DOI: 10.1177/2277978715602398

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