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Nominal rigidities, relative prices and skewness

M. Angeles Caraballo () and Carlos Dabús

No E2005/17, Economic Working Papers at Centro de Estudios Andaluces from Centro de Estudios Andaluces

Abstract: The menu costs model developed by Ball and Mankiw (BM)(1994,1995) predicts that inflation is positively related to the skewness of price changes distribution. We test this prediction in different inflationary contexts: Spain (1975-2002) and Argentina (1960-1989). We find a positive inflation-skewness relationship in both countries at low inflation, even though the mean annual inflation rates were very different: 2,2% for Spain and 23% for Argentina. Therefore, the threshold of low inflation under which the menu costs model is suitable is determined endogenously, and it depends on the inflationary experience of each economy. In the higher inflation periods skewness is not significant. Finally, our results suggest that the menu-costs model is not suitable beyond certain threshold of inflation.

Keywords: menu costs; skewness; relative prices; inflation regimes (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2005
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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