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September 2008 issue
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Angelini, Del Giovane, Siviero, Terlizzese
Van Roy
Bick, Nautz
Kobayashi
Gerlach-Kristen
Gosselin, Lotz, Wyplosz
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Inflation Thresholds and Relative Price Variability: Evidence from U.S. Cities

by Alexander Bick and Dieter Nautz
Department of Money and Macroeconomics, Goethe University Frankfurt

Abstract

The impact of inflation on relative price variability (RPV) is an important channel for real effects of inflation. With a view to the recent debate on the Federal Reserve's implicit lower and upper bounds of its inflation objective, we introduce a modified version of Hansen's panel threshold model to explore the inflation-RPV linkage in U.S. cities. We find two significant inflation thresholds and both positive and negative effects of inflation on RPV. The smallest effect of inflation on RPV is ensured if inflation is low but well above zero. If monetary policy aims at minimizing inflation's impact on relative prices, our estimates suggest that U.S. inflation should range between 1.8 percent and 2.8 percent.

JEL Codes: E31, C23.

 
Full article (PDF, 16 pages 237 kb)