Abstract
One potential real effect of inflation is its influence on the dispersion of relative prices in the economy which affects economic efficiency and aggregate output. Using a novel data set for the US and UK and a VARMA asymmetric bivariate GARCH-M model of inflation and relative price dispersion, we test for the effects of inflation and inflation uncertainty on relative price dispersion. We obtain two main results: First, inflation affects relative price dispersion positively in the US supporting the menu costs model and negatively in the UK supporting the monetary search model. Second, there is no evidence for the role of inflation uncertainty in explaining relative price dispersion, either for the US or the UK.
| Original language | English |
|---|---|
| Pages (from-to) | 3-24 |
| Number of pages | 22 |
| Journal | Credit and Capital Markets |
| Volume | 50 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 2017 |
| Externally published | Yes |
Keywords
- GARCH-M
- Inflation
- Relative Price Dispersion
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