Relative Price Distortions and Inflation Persistence.

Tatiana Damjanovic, Charles Nolan

    Research output: Contribution to journalArticlepeer-review

    14 Citations (Scopus)

    Abstract

    Sticky-price models often suggest that relative price distortion is a major cost of inflation. We provide an intuition for this: Even at low rates, inflation strongly affects price dispersion which in turn has an impact on the economy qualitatively similar to, and of the order of magnitude of, a negative shift in productivity. The utility cost of price dispersion is quantified and its impact on optimal monetary policy discussed. Price dispersion is incorporated into a linearised model. Strikingly, a contractionary nominal shock has a persistent, negative hump-shaped impact on inflation but may have a positive hump-shaped impact on output.
    Original languageEnglish
    Pages (from-to)1080 - 1099
    Number of pages20
    JournalThe Economic Journal
    Volume120
    Issue number547
    Early online date12 Jan 2010
    DOIs
    Publication statusPublished - Sept 2010

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