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

Constantina Kottaridi (), Diego Méndez-Carbajo () and Dimitrios Thomakos
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Diego Méndez-Carbajo: Illinois Wesleyan University, USA

Authors registered in the RePEc Author Service: Diego Mendez-Carbajo ()

Working Paper series from Rimini Centre for Economic Analysis

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 does the cross-sectional skewness in producer prices affect 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: Inflation; Cross-sectional distribution of prices; Greece, Portugal, Spain; European Union; Harmonization (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Date: 2007-07
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http://www.rcea.org/RePEc/pdf/wp43_07.pdf

Related works:
Chapter: Inflation Dynamics and the Cross-Sectional Distribution of Prices in the E.U. Periphery (2009)
Working Paper: Inflation Dynamics and the Cross-Sectional Distribution of Prices in the E.U. Periphery (2007) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:43_07

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