Evidence on the effects of inflation on price dispersion under indexation

Sven Schreiber and Juliane Scharff ()
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Juliane Scharff: Halle Institute for Economic Research (IWH)

No 12-2008, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: Distortionary effects of inflation on relative prices are the main argument for inflation stabilization in macro models with sticky prices. Under indexation of nonoptimized prices those models imply a nonlinear and dynamic impact of inflation on the cross-sectional price dispersion (relative-price variability, RPV). Using US sectoral prices we estimate (a generalized form of) the theoretical relationship between inflation and RPV. We confirm the impact of inflation fluctuations but find hitherto neglected endogeneity biases, and our IV and GMM estimates indicate that average (“trend”) inflation is significant for indexation. Lagged inflation is less important.

Keywords: relative price variability; trend inflation; endogeneity bias (search for similar items in EconPapers)
JEL-codes: C22 E31 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Journal Article: Evidence on the effects of inflation on price dispersion under indexation (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:imk:wpaper:12-2008

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