Inflation Dynamics & the Cross-Sectional Distribution of Prices in the E.U. Periphery

35 Pages Posted: 29 May 2007 Last revised: 6 Dec 2007

See all articles by Constantina Kottaridi

Constantina Kottaridi

University of Piraeus

Diego Mendez-Carbajo

Illinois Wesleyan University

Dimitrios D. Thomakos

University of Peloponnese - School of Management, Economics and Informatics; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Date Written: October 6, 2007

Abstract

We explore the connection between inflation and its higher-order moments for three economies in the periphery of the European Union (E.U.), Greece, Portugal and Spain. Motivated by a micro-founded model of inflation determination, along the lines of the hybrid New Keynesian Phillips curve, we examine whether and how much does the cross-sectional skewness in producer prices affect the path of inflation. We develop our analysis with the perspective of economic integration/inflation harmonization (in the E.U.) and discuss the peculiarities of these three economies. We find evidence of a strong positive relation between aggregate inflation and the distribution of relative-price changes for all three countries. A potentially important implication of our results is that, if the cross-sectional skewness of prices is directly related to aggregate inflation, not only the direction but also the magnitude of a nominal shock would influence output and inflation dynamics. Moreover, the effect of such a shock could be received asymmetrically, even when countries share a common currency.

Keywords: Inflation, Cross-sectional distribution of prices,Greece, Portugal, Spain, European Union, Harmonization

JEL Classification: E31

Suggested Citation

Kottaridi, Constantina and Mendez-Carbajo, Diego and Thomakos, Dimitrios D., Inflation Dynamics & the Cross-Sectional Distribution of Prices in the E.U. Periphery (October 6, 2007). Available at SSRN: https://ssrn.com/abstract=989223 or http://dx.doi.org/10.2139/ssrn.989223

Constantina Kottaridi (Contact Author)

University of Piraeus ( email )

Piraeus, 18534
Greece

Diego Mendez-Carbajo

Illinois Wesleyan University ( email )

P.O. Box 2900
Bloomington, IL 61702-2900
United States

Dimitrios D. Thomakos

University of Peloponnese - School of Management, Economics and Informatics ( email )

Department of Economics
22100 Tripolis
Greece
+30 2710 230139 (Fax)

HOME PAGE: http://es.uop.gr/

University of Bologna - Rimini Center for Economic Analysis (RCEA)

Via Patara, 3
Rimini (RN), RN 47900
Italy

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