Asymmetric impact of relative price shocks in presence of trend inflation

ABSTRACT

This study examines whether skewness of cross-sectional distribution of relative price shocks has asymmetric impact on aggregate inflation. The empirical evidence from major economies suggests that the positively skewed shocks have different impact from that of negatively skewed shocks on aggregate inflation. In particular, the empirical results indicate that this asymmetry in the impact of relative price shocks mainly depends on the nature of trend that inflation exhibits for a given period. The crucial inference that emerges from the empirical findings is that the traditional approach of using a simple linear regression model, to examine the relationship between inflation and skewness in presence of trend inflation, is not appropriate as it may lead to misleading conclusions.

KEYWORDS:

• Inflation
• distribution of relative price shocks
• menu costs
• asymmetry

JEL CLASSIFICATION:

• E30
• E31
• E50

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ More recently, Rather, Sunil, and Durai (2015); Catik, Martin, and Onder (2011) and Binner et al., (2010) have empirically examined the reliability of skewness as a measure of supply shock.

² In empirical literature, skewness of distribution of actual/observed price changes is used as a proxy for the skewness of the distribution of desired price changes.

³ Here, I focus only on the symmetry of contemporaneous effect.

⁴ During these sample periods, the inflation series for the respective countries exhibits a clear (positive/negative) trend.

⁵ The equation(3) was not estimated for the countries for which one of the coefficient ${\beta }_{0}or{\rho }_0$ turn out to be insignificant.