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

Chapter

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 the cross-sectional skewness in producer prices affects 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

Euro Area European Monetary Union Weak Instrument Producer Price Index Monet Econ 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
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Copyright information

© Springer-Verlag Berlin Heidelberg 2009

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of PeloponneseKyotoTripolisGreece
  2. 2.Department of EconomicsIllinois Wesleyan UniversityBloomingtonUSA

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