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Inflation and the Distribution of Price Changes

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  • Michael F. Bryan
  • Stephen G. Cecchetti
Abstract
its higher order moments, and in particular, its third moment the skewness of the price change distribution. Evidence on correlations between inflation and its moments goesback over thirty years, and was first used to reject the independence of relative price changes and inflation that is assumed in neo- classical models. More recently, New Keynesian macroeconomists have shown that the strong positive correlation between inflation and the skewness of the price change distribution is consistent with menu-cost models of price setting behavior. This is a fairly controversial result, prompting other researchers to demonstrate that the same correlation can be found in a multi- sector, flexible-price (real business cycle) model. We examine the small-sample properties of the main empirical finding on which this work is based: the positive correlation between the sample mean and sample skewness of price change distributions. Our results show that this particular statistic suffers from a large positive small-sample bias, and demonstrate that the entirety of the observed correlation can be explained by this bias. To the extent that we find any relationship at all, it is that the correlation is negative. In other words, we establish that one of the most accepted stylized facts in the literature on aggregate price behavior, that inflation and the skewness of the price change distribution are positively linked, need not be a fact at all.

Suggested Citation

  • Michael F. Bryan & Stephen G. Cecchetti, 1996. "Inflation and the Distribution of Price Changes," NBER Working Papers 5793, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5793
    Note: ME
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    References listed on IDEAS

    as
    1. Balke, Nathan S. & Wynne, Mark A., 2000. "An equilibrium analysis of relative price changes and aggregate inflation," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 269-292, April.
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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