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5 Pages Posted: 17 Apr 2020
Date Written: March 25, 2020
Abstract
The objective of Basilio and Cacnio’s paper is to examine the link between the distribution of relative price (rp) changes and short-run inflation (π) for the Philippines between 1994 and 2019. The authors follow the approach of Ball and Mankiw (1995), who focus on higher-order moments such as skewness in the distribution of relative price shocks and the implications for inflation. The presence of higher-order moments leads to asymmetric price adjustments in response to shocks compared to the case with normally distributed relative price changes. This issue is pertinent when considering the effects of supply shocks, which are likely to affect the distribution of relative prices most. Supply shocks are often a cause of inflation in the Philippines, particularly in the food and oil sectors, and are likely to become more prevalent in the face of climate change. Hence, monetary policy depends on knowing the nature of the shock and how changes in relative prices might affect inflation.
Using disaggregated monthly data for 94 items that make up the CPI, Basilio and Cacnio use the moments of the distribution of the relative price changes to show that the distribution of elements of the CPI data is non-normal. They then calculate an asymmetry index of the distribution of shocks to relative prices. The measure looks at the difference between the mass in the upper and lower tails of the distribution of shocks. It is then used in a regression model of inflation. The authors also perform a simple regression of inflation on the standard deviation and skewness of the distribution of relative prices, oil prices and rice prices. They find that there is a relationship between the distribution of relative price changes and inflation in the short run. Importantly, they find that the tails matter.
Full Publication: Inflation Dynamics in Asia and the Pacific
Suggested Citation: Suggested Citation
Renee Fry-Mckibbin (Contact Author)
Australian National University (ANU) - Crawford School of Public Policy ( email )
7 Liversidge Street
Lennox Crossing
Canberra, ACT 0200
Australia