Inflation and Supply Shocks in Spain: A Regional Approach

This paper analyses the effects of supply shocks on the Spanish inflation rate. Our goal is to determine if there is a homogeneous behaviour across regions with regard to that issue or if, on the contrary, there are regions more inflationary than others. In this sense, this paper tries to throw some light on the causes of the recent increase in the Spanish inflation rate and the relation of this fact with the evolution of oil prices. The methodology applied is based on the seminal paper of Ball and Mankiw (1995). Those authors assume that a good proxy for supply shocks is the third moment of the distribution of changes in relative prices, and show that for no trend inflation regimes the presence of nominal rigidities, like menu costs, implies a positive relationship between inflation and skewness -i.e., the supply shocks-, that is magnified by the variance of the distribution. In order to achieve these goals, we have chosen the 1993-2005 period, given that it fulfils the features required to apply the methodology above mentioned. The data used are the monthly consumer price indexes of each region, disaggregated in 57 categories. As a first stage, we have checked that the skewness of the distribution of changes in relative prices is a good proxy for supply shocks. After that, the relationship between inflation and the higher moments of the distribution is estimated. Moreover, control variables as interest rates and unemployment rates have been introduced. The analysis has been carried out in two ways. On one hand, each region is analysed separately and, on the other hand, we have used panel data techniques in order to test homogeneity across regions. Our results point out that Spanish regions show a common pattern with regard to inflation behaviour and that they are vulnerable to supply shocks.