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

Constantina Kottaridi (), Mendez-Carbajo Diego () and D. Thomakos Dimitrios ()
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Mendez-Carbajo Diego: Illinois Wesleyan University
D. Thomakos Dimitrios: University of Peloponnese

A chapter in International Trade and Economic Dynamics, 2009, pp 449-475 from Springer

Abstract: We explore the connection between inflation and its higher-order 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 the cross-sectional skewness in producer prices affects 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: Euro Area; European Monetary Union; Weak Instrument; Producer Price Index; Monet Econ (search for similar items in EconPapers)
Date: 2009
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Working Paper: Inflation Dynamics and the Cross-Sectional Distribution of Prices in the E.U. Periphery (2007) Downloads
Working Paper: Inflation Dynamics and the Cross-Sectional Distribution of Prices in the E.U. Periphery (2007) Downloads
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DOI: 10.1007/978-3-540-78676-4_30

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