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Inflation and Relative Price Dispersion in Canada: An Empirical Assessment

André Binette and Sylvain Martel

Staff Working Papers from Bank of Canada

Abstract: The authors investigate empirically the relationship between different aspects of inflation and relative price dispersion in Canada using a Markov regime-switching Phillips curve. They examine three theories that explain movements in relative price dispersion: the signal extraction model, the extension of the signal extraction model, and the menu cost model. The authors show that expected inflation, which is captured by the menu cost model, is the aspect of inflation that is most closely associated with relative price dispersion. Furthermore, this result seems robust to different specifications. The authors, however, cannot completely discard inflation uncertainty (the signal extraction model), especially when using core inflation. They also observe a strong asymmetry regarding the impact of positive and negative unexpected inflation on relative price dispersion using total inflation, but this asymmetry is not observed for core inflation. This suggests that the strong asymmetry arises mainly from the presence of components typically associated with supply shocks, and not from the presence of downward nominal rigidities, as Aarstol (1999) proposes, following Ball and Mankiw (1992a,b).

Keywords: Inflation; and; prices (search for similar items in EconPapers)
JEL-codes: C32 E31 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2005
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (4) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:05-28

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