| Publisher | Vanderbilt University | ||
|---|---|---|---|
| Format | 135.6KB PDF, requires Acrobat Rdr 5 | Date added | 01 Feb 2001 |
| Topics | Economic Modeling | ||
| Downloads | 6 | ||
Across many time periods and countries, and with many specifications, inflation
has been linked to the variability of relative prices. This finding is important because it appears to be at odds with the classical dichotomy of real and nominal variables, and,
correspondingly, because it highlights major macroeconomic policy questions.
In the present paper, we merely add to the empirical landslide of results indicating that, yes, aggregate price changes are linked to the dispersion of relative prices. Yet, our
key finding prompts us to take a step away from the two prominent explanations of the earlier results. We examine panels of equity prices from the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation (NASDAQ), alongside a panel of U.S. prices of goods and services. We find that overall
price changes and price dispersion appear to be as closely linked in the equity markets as they are in markets for goods and services. While this result does not invalidate either
the imperfect information approach or the menu cost, our result presents a puzzle since neither of the two approaches can convincingly explain it.
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