Inflation, inflation uncertainty, and relative price dispersion: Evidence from bivariate GARCH-M models

Kevin B. Grier, Mark J. Perry

Research output: Contribution to journalArticle

42 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)391-405
Number of pages15
JournalJournal of Monetary Economics
Volume38
Issue number2
DOIs
StatePublished - Oct 1996

Keywords

  • GARCH
  • Inflation
  • Inflation uncertainty
  • Relative price dispersion

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