Inflation and Relative Price Variability: Parks' Study Reexamined

Bomberger, William A.; Makinen, Gail E.

doi:10.2307/2077810

Cited by 32 publications

(16 citation statements)

References 7 publications

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“…However, as Bomberger and Makinen (1993) already emphasized, the link between US inflation and RPV might be solely due to a few episodes of high inflation. The present paper therefore reinvestigates the relation between inflation and RPV for Germany, the textbook example for a low inflation country.…”

Section: Introductionmentioning

confidence: 93%

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

Nautz

Scharff

2005

German Economic Review

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The recent literature on the welfare cost of inflation emphasizes inflation's effect on the variability of relative prices. Expected and unexpected inflation have both been proposed to increase relative price variability (RPV) and, thereby, to distort the information content of nominal prices. This paper presents new evidence on the impact of inflation on RPV in Germany. Our results indicate that the influence of expected inflation disappears if a credible monetary policy stabilizes inflationary expectations on a low level. Yet the significant impact of unexpected inflation suggests that even low inflation rates can lead to welfare losses by raising RPV above its efficient level.JEL classification: E31.

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Section: Introductionmentioning

confidence: 93%

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

Nautz

Scharff

2005

German Economic Review

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“…1 However, more sophisticated analysis has since found evidence that the relationship between inflation and RPV is likely to be nonlinear. For example, authors using a quadratic functional form, such as Parks (1978), Hercowitz (1981), Blejer and Leiderman (1980), Bomberger and Makinen (1993), Grier and Perry (1996) and Aarstol (1999), and those using piecewise linear (V-shaped) functional forms, such as Fischer (1981), van Hoomissen (1988) and Tommasi (1991), have consistently rejected the linear functional form against the alternative of nonlinearity.…”

Section: Introductionmentioning

confidence: 99%

Evidence on the Functional Relationship between Relative Price Variability and Inflation with Implications for Monetary Policy

Fielding

Mizen

2008

Economica

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This paper considers the functional relationship between relative price variability (RPV) and inflation using quarterly personal consumer expenditure data in the US over 1967(I)-2003(I), deriving some implications for monetary policy. Non-parametric regression techniques are used to explore the shape of the RPV function, and this shape is related to the theory outlined by J. J. Rotemberg. The empirical RPV function yields a plausible 'optimal' value of inflation in the region of five percentage points, which is consistent with this theory and lies within the range of values cited by recent evaluations of 'sand' and 'grease' effects. Copyright (c) The London School of Economics and Political Science 2007.

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“…Bomberger and Makinen (1993), Silver and Ioannidis (2001), Konieczny and Skrzypacz (2005), we estimate expected and unexpected inflation in Equation (2) using an AR(12) core inflation forecast for each country.…”

Section: Expected Inflation Versus Unexpected Inflationmentioning

confidence: 99%

“…A possible solution to this endogeneity bias is the application of core inflation as explanatory variable, see e.g. Jaramillo (1999) or Bomberger and Makinen (1993).…”

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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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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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Inflation and Relative Price Variability: Parks' Study Reexamined

Cited by 32 publications

References 7 publications

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

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

Evidence on the Functional Relationship between Relative Price Variability and Inflation with Implications for Monetary Policy

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

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