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Evidence on the effects of inflation on price dispersion under indexation (with Juliane Scharff)

Published in "Empirical Economics", 2012, vol. 43, no. 1, pp. 291-311.

Keywords: relative price variability, trend inflation, endogeneity bias

Download: Version February 2010 (PDF)

Abstract: Distortionary effects of inflation on relative prices are the main argument for inflation stabilization in macro models with sticky prices. Under indexation of non-optimized prices those models imply a nonlinear and dynamic impact of inflation on the cross-sectional price dispersion (relative price or inflation variability, RPV). Using US sectoral price data we estimate such a relationship between inflation and RPV. We confirm the impact of inflation fluctuations but find hitherto neglected endogeneity biases, and our IV and GMM estimates indicate that average ("trend") inflation is significant for indexation. Lagged inflation is less important.

(Latest update: October 2017)