Inflation Dynamics & the Cross-Sectional Distribution of Prices in the E.U. Periphery
35 Pages Posted: 29 May 2007 Last revised: 6 Dec 2007
Date Written: October 6, 2007
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: Suggested Citation