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Inflation and Relative Price Dispersion in Canada: An Empirical Assessment

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  • André Binette
  • Sylvain Martel

Abstract

The authors investigate empirically the relationship between different aspects of inflation and relative price dispersion in Canada using a Markov regime-switching Phillips curve. They examine three theories that explain movements in relative price dispersion: the signal extraction model, the extension of the signal extraction model, and the menu cost model. The authors show that expected inflation, which is captured by the menu cost model, is the aspect of inflation that is most closely associated with relative price dispersion. Furthermore, this result seems robust to different specifications. The authors, however, cannot completely discard inflation uncertainty (the signal extraction model), especially when using core inflation. They also observe a strong asymmetry regarding the impact of positive and negative unexpected inflation on relative price dispersion using total inflation, but this asymmetry is not observed for core inflation. This suggests that the strong asymmetry arises mainly from the presence of components typically associated with supply shocks, and not from the presence of downward nominal rigidities, as Aarstol (1999) proposes, following Ball and Mankiw (1992a,b).

Suggested Citation

  • André Binette & Sylvain Martel, 2005. "Inflation and Relative Price Dispersion in Canada: An Empirical Assessment," Staff Working Papers 05-28, Bank of Canada.
    • Handle: RePEc:bca:bocawp:05-28
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    References listed on IDEAS

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    Cited by:

    1. Kitov, Ivan, 2007. "Exact prediction of inflation and unemployment in Canada," MPRA Paper 5015, University Library of Munich, Germany.
    2. Oleg KITOV & Ivan KITOV, 2012. "A Win-Win Monetary Policy In Canada," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 6(6(18)/ Su), pages 160-176.
    3. María Ángeles Caraballo & Carlos Dabús., 2008. "The Determinants of Relative Price Variability: Further Evidence from Argentina," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 45(132), pages 235-255.
    4. David Fielding & Christopher Hajzler & James (Jim) C. MacGee, 2017. "Price-Level Dispersion versus Inflation-Rate Dispersion: Evidence from Three Countries," Staff Working Papers 17-3, Bank of Canada.

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    More about this item

    Keywords

    Inflation and prices;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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