Inflation and Relative Price Variability in a Low Inflation Country: Empirical Evidence for Germany

Nautz, Dieter; Scharff, Juliane

doi:10.1111/j.1468-0475.2005.00144.x

Cited by 26 publications

(16 citation statements)

References 33 publications

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“…However, a different role of expected and unexpected inflation is not only found empirically (Aarstol (1999), Nautz and Scharff (2005)) but also suggested by various theories explaining the inflation-RPV link.…”

Section: Expected Inflation Versus Unexpected Inflationmentioning

confidence: 95%

“…(Fielding and Mizen (2000), Silver and Ioannidis (2001), Konieczny and Skrzypacz (2005), Nautz and Scharff (2005)). While some allow for a specific role of expected and unexpected inflation, a common feature of all these contributions is that they restrict the attention to linear relationships implying that the marginal impact of inflation on RPV does not depend on the inflation level.…”

Section: Non Technical Summarymentioning

confidence: 99%

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Inflation and relative price variability in the euro area: evidence from a panel threshold model

Nautz

Scharff

2012

Applied Economics

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In recent macroeconomic theory, relative price variability (RPV) generates the central distortions of inflation. This paper provides first evidence on the empirical relation between inflation and RPV in the euro area focusing on threshold effects of inflation. We find that expected inflation significantly increases RPV if inflation is either very low (below -1.38% p.a.) or very high (above 5.94% p.a.). In the intermediate regime, however, expected inflation has no distorting effects which supports price stability as an outcome of optimal monetary policy. Keywords Non Technical SummaryThere is now a general consensus that inflation produces welfare costs and price stability should be the prior goal of monetary policy. In this regard, recent macroeconomic theory emphasizes the distorting impact of inflation on the information content of nominal prices. If inflation causes a suboptimal adjustment of goods prices due to price adjustment costs or imperfect information, then inflation increases relative price variability (RPV), reduces the transparency of the relative price mechanism and impedes the efficient allocation of resources.The bulk of the empirical literature deals with the linear relationship between inflation and RPV implying that the marginal impact of inflation on RPV does not depend on the inflation level. However, the impact of inflation on the economy might be non-linear.As the empirical literature on the link between inflation and long-term growth shows, the effect of inflation on growth changes if inflation is above certain threshold values of inflation. Moreover, the European Central Bank, for example, defines price stability as an inflation rate below but close to the critical level of 2%.Accounting for a potential non-linear impact of inflation on the economy, this study provides evidence on the empirical relation between inflation and RPV in the euro area focusing on threshold effects of inflation. The application of panel threshold models allows to test for the number of inflation thresholds and to estimate both the threshold levels as well as the marginal impact of inflation on RPV for the various threshold levels of inflation. The empirical results show that threshold effects of inflation can be confirmed for the inflation-RPV nexus in the euro area. In addition to a linear impact of unexpected inflation, there is strong evidence in favor of a non-linear influence of expected inflation on RPV. We find that expected inflation significantly increases RPV if price changes are either clearly negative (< -1.4% p.a.) or very high (> 5.9% p.a.).Between these two thresholds expected inflation has according to our estimations no real effects on the economy via its impact on RPV (but may have other effects).Therefore, threshold effects of inflation provide a further rational for the announcement of critical levels of inflation and inflation target zones. Nicht technische Zusammenfassung

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Section: Expected Inflation Versus Unexpected Inflationmentioning

confidence: 95%

Section: Non Technical Summarymentioning

confidence: 99%

Inflation and relative price variability in the euro area: evidence from a panel threshold model

Nautz

Scharff

2012

Applied Economics

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“…Sheshinski and Weiss (1977), Rotemberg (1983), Lucas (1972), Barro (1976), Hercowitz (1981)) as well as empirical studies (e.g. Nautz and Scharff (2005) and Mizen and Russell (2007)) indicate that inflation causes relative price variability which in our opinion justifies including inflation rather than inflation volatility in our model. 9 It also explains why we do not take directly into account the Fisher equation according to which a rise in inflation raises the nominal interest rate and as a result the cost of capital (we are grateful for this remark to an anonymous referee).…”

Section: _________________________mentioning

confidence: 99%

Does Inflation Harm Corporate Investment? Empirical Evidence from OECD Countries

Ciżkowicz

Rzońca

2013

Economics

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Theoretical models point at various channels of the impact of inflation on corporate investment. This article attempts to answer the question what the direction and strength of this possible impact is, examining the relationship between corporate investment and inflation on the sample of 21 OECD countries in the years 1960-2005. The obtained negative relationship, statistically and economically significant, proves robust to changes in the specification of the estimated equation, estimators, frequency of variables used in the study and analysed period. Moreover, the obtained results suggest a nonlinear character of this relationship: the marginal effect on corporate investment is higher at inflation rates between 3 and 5.5 per cent. These results suggest that the impact of inflation on corporate investment dynamics may be the source of the nonlinear nature of the relationship between GDP growth and inflation identified in previous empirical studies. Finally, taking into account the direct impact of inflation on investment, variables approximating the cost of capital utilisation prove to be statistically insignificant determinants of corporate investment. JEL E22 C23 D22 D81 E31 F44

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“…This result has important monetary policy implications: if the optimal inflation rate is positive, reducing inflation below it should increase RPV, and the welfare costs associated with higher price dispersion. Finally, Nautz and Scharff (2005) for Germany, and Nautz and Scharff (2006) for the Euro-area find that RPV is increasing with inflation, even in a low inflation environment. Several theoretical approaches try to disclose the links underlying such a relation: menu cost models emphasize the role of expected inflation, while the Lucas-type incomplete information approach argues that non-neutrality is explained by uncertainty and unexpected inflation.…”

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confidence: 89%

Price Dispersion and Optimal Inflation: The Spanish Case

Caraballo

Dabús

2013

Journal of Applied Economics

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This paper studies the relation between inflation and relative price variability (RPV) in Spain during the 1987-2009 period. We find that this relation presents a U-shape profile, and that the optimal annual inflation rate (defined as the one that minimizes RPV) is around 4%, higher than the 2% inflation target proposed by the European Monetary Union. More importantly, this result does not depend on whether the monetary regime is before or after the euro. Hence, the main policy implication is that disinflation efforts to achieve the 2% inflation target result in welfare losses. The key link between inflation and RPV is unexpected inflation, whose optimal level is around zero. This suggests that monetary policy matters: the welfare costs associated with higher RPV can be minimized with a credible and predictable inflation targeting policy set at the appropriate level. JEL classification codes: E30, E31

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Inflation and Relative Price Variability in a Low Inflation Country: Empirical Evidence for Germany

Cited by 26 publications

References 33 publications

Inflation and relative price variability in the euro area: evidence from a panel threshold model

Inflation and relative price variability in the euro area: evidence from a panel threshold model

Does Inflation Harm Corporate Investment? Empirical Evidence from OECD Countries

Price Dispersion and Optimal Inflation: The Spanish Case

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