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Relative Prices as Aggregate Supply Shocks with Trend Inflation

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  • David Demery
  • Nigel W. Duck

Abstract

This paper modifies the menu-cost model that Ball and Mankiw (1995) put forward to explain the correlation between the first- and higher-moments of the distribution of US price changes by allowing for non-zero trend inflation. Simulations suggest that even if trend inflation is only mildly positive - such as the 3 percent per annum experienced by the US in the last 50 years - the predictions of the Ball and Mankiw model are greatly altered. We then show that some of these predictions are rejected by annual post-WW2 US data.

Suggested Citation

  • David Demery & Nigel W. Duck, 2005. "Relative Prices as Aggregate Supply Shocks with Trend Inflation," Bristol Economics Discussion Papers 05/570, School of Economics, University of Bristol, UK.
    • Handle: RePEc:bri:uobdis:05/570
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    File URL: http://www.bristol.ac.uk/efm/media/workingpapers/working_papers/pdffiles/dp05570.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Inflation; menu-cost; relative price variance; relative price skewness; skew-normal.;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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