INFLATION AND PRICE DISPERSION IN EQUITY MARKETS AND IN GOODS AND SERVICES MARKETS

David Parsley Helen Popper
Authors registered in the RePEc Author Service: Helen Popper and David Parsley

Macroeconomics from University Library of Munich, Germany

Abstract: An empirical link between inflation and price dispersion has been well established in goods and services markets – both across time periods and across countries. However, the economic interpretation of this link has been typically frustrated by the observational equivalence of the predictions of the prominent theories. This prompts us to take a new approach. Specifically, we examine the link between inflation and price dispersion in an empirical setting patently lacking the market characteristics central to these theories (i.e., menu costs, or relative/aggregate confusion). In particular, we benchmark the inflation-dispersion link in goods and services markets with a matched panel of equity market prices. Surprisingly, we find that a link – comparable to that found in markets for goods and services – does exist in the equity market. Moreover, we find that our results are not due to a potentially important, but generally overlooked, bias that is present in many existing studies. Our results suggest that the debate over the factors responsible for the inflation/price dispersion link should be broadened to account for the asset market links we document.

Keywords: relative price variability; stock markets; goods markets; inflation (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2002-11-11
New Economics Papers: this item is included in nep-fmk
Note: Type of Document - pdf; prepared on IBM PC - PC-TEX/UNIX Sparc TeX; to print on HP/PostScript/Franciscan monk; pages: 35; figures: included/request from author/draw your own
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Citations: View citations in EconPapers (1)

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