Publication Date: 09 October, 2013
Relative price dispersion and inflation: Evidence for the UK and US. 2013.
Gulnihal Aksoy, Don Bredin, Keith Cuthbertson, and Stilianos Fountas.
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 and negatively in the UK. Second, inflation uncertainty is in most cases insignificant in explaining relative price dispersion, thus casting doubt on the empirical relevance of the signal extraction models.