TY - JOUR
T1 - Inflation, inflation uncertainty, and relative price dispersion
T2 - Evidence from bivariate GARCH-M models
AU - Grier, Kevin B.
AU - Perry, Mark J.
PY - 1996/10
Y1 - 1996/10
N2 - One potential real effect of inflation is its influence on the dispersion of relative prices in the economy. Menu cost models generally imply that higher trend inflation will increase price dispersion. In contrast, signal extraction models predict that increased inflation uncertainty will raise relative price dispersion. Existing empirical studies do not distinguish between these separate hypotheses. We constuct a bivariate GARCH-M model of inflation and relative price dispersion to test these differing explanations in a single model and find that inflation uncertainty dominates trend inflation as a predictor of relative price dispersion.
AB - One potential real effect of inflation is its influence on the dispersion of relative prices in the economy. Menu cost models generally imply that higher trend inflation will increase price dispersion. In contrast, signal extraction models predict that increased inflation uncertainty will raise relative price dispersion. Existing empirical studies do not distinguish between these separate hypotheses. We constuct a bivariate GARCH-M model of inflation and relative price dispersion to test these differing explanations in a single model and find that inflation uncertainty dominates trend inflation as a predictor of relative price dispersion.
KW - GARCH
KW - Inflation
KW - Inflation uncertainty
KW - Relative price dispersion
UR - http://www.scopus.com/inward/record.url?scp=0030268416&partnerID=8YFLogxK
U2 - 10.1016/S0304-3932(96)01280-9
DO - 10.1016/S0304-3932(96)01280-9
M3 - Article
AN - SCOPUS:0030268416
SN - 0304-3932
VL - 38
SP - 391
EP - 405
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
IS - 2
ER -