Relative Prices, Price Level and Inflation: Effects of Asymmetric and Sticky Adjustment

The IUP Journal of Applied Economics, Vol. XII, No. 2, April 2013, pp. 41-61

Posted: 10 May 2013

See all articles by Shruti Tripathi

Shruti Tripathi

Indira Gandhi Institute of Development Research (IGIDR)

Ashima Goyal

Indira Gandhi Institute of Development Research (IGIDR)

Date Written: May 8, 2013

Abstract

The paper examines how relative price shocks can affect the price level and then inflation. Using Indian data, it is observed that: (1) Price increases exceed price decreases. Aggregate inflation depends on the distribution of relative price changes — inflation rises when the distribution is skewed to the right; (2) Such distribution-based measures of supply shocks perform better than the traditional measures, such as prices of energy and food. They moderate the price puzzle, whereby a rise in policy rates increases inflation, are significant in estimations of New Keynesian aggregate supply, and show the Indian aggregate supply curve to be flat, but subject to shifts; (3) An average Indian firm changes prices about once in a year. The estimated Calvo parameter implies that half of the Indian firms reset their prices in any period, while 66% of firms are forward looking in their price setting. These estimated real and nominal price rigidities imply policy needs to anchor inflationary expectations in response to supply shocks, but policy responses must be moderate.

Suggested Citation

Tripathi, Shruti and Goyal, Ashima, Relative Prices, Price Level and Inflation: Effects of Asymmetric and Sticky Adjustment (May 8, 2013). The IUP Journal of Applied Economics, Vol. XII, No. 2, April 2013, pp. 41-61, Available at SSRN: https://ssrn.com/abstract=2262302

Shruti Tripathi (Contact Author)

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Film City Road, Goregaon(E)
Goregaon (East)
Mumbai, Maharashtra 400065
India

Ashima Goyal

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Bombay 400065, Maharashtra
India
+91 22 28400920 (Phone)
+91 22 28402752 (Fax)

HOME PAGE: http://www.igidr.ac.in/~ashima

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