Menu Costs, Relative Prices, and Inflation: Evidence for Canada

Bank of Canada Working Paper 97-14

45 Pages Posted: 2 Apr 1998

See all articles by Robert A. Amano

Robert A. Amano

Bank of Canada & CREFE

Tiff Macklem

affiliation not provided to SSRN

Date Written: June 1997

Abstract

The menu-cost models of price adjustment developed by Ball and Mankiw (1994; 1995) predict that short-run movements in inflation should be positively related to the skewness and the variance of the distribution of disaggregated relative-price shocks in each period. We test these predictions on Canadian data using the distribution of changes in disaggregated producer prices to measure the skewness and standard deviation of relative-price shocks. We find the Canadian data, both in the context of partial correlations and standard price Phillips curve equations, are highly supportive of the predictions that arise from the menu-cost models. Indeed, we find that the positive relationship between inflation and the skewness of the distribution of relative-price shocks is one of the most robust features of the Canadian Phillips curve and significantly improves our ability to explain inflation dynamics.

JEL Classification: E31

Suggested Citation

Amano, Robert A. and Macklem, Tiff, Menu Costs, Relative Prices, and Inflation: Evidence for Canada (June 1997). Bank of Canada Working Paper 97-14. Available at SSRN: https://ssrn.com/abstract=73079 or http://dx.doi.org/10.2139/ssrn.73079

Robert A. Amano (Contact Author)

Bank of Canada & CREFE ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-8827 (Phone)
613-782-7163 (Fax)

Tiff Macklem

affiliation not provided to SSRN

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