Inflation and the Distribution of Relative Prices: The Role of Productivity and Money Supply Shocks

Abstract

This paper examines the role of aggregate productivity and money supply shocks in determining the relationship between inflation and the distribution of relative commodity prices. I estimate a restricted VAR that includes aggregate variables and individual commodity prices, and compute the distribution of the dynamic responses of commodity prices to these aggregate shocks for each forecast horizon. The findings indicate that both shocks lead to positive correlation between inflation and the dispersion of relative prices, and that the response of prices across commodities is not uniform, even in the long-run.

Keywords: Relative price dispersion, VAR, monetary neutrality

JEL Classification: E3, E4, E5