Price Asymmetries, Relative Price Variability and Inflation: Some International Evidence

Sean Holly
Department of Economics, University of Sheffield
S.Holly@sheffield.ac.uk

Abstract

Evidence is beginning to accumulate that there are significant asymmetries in the pricing and output behaviour of firms. In this paper we have provided some evidence for both the effect of relative price variability on inflation and price asymmetry in the US, Japan, Germany and the UK. The results show significant effects of relative price variability consistent with the model of Ball and Mankiw (1995). Ball and Mankiw (1994) use a menu cost model to show that prices will tend to adjust faster in an upwards than in a downwards direction in response to shocks. In order to test for this we use the rate of growth of the money stock as the anchor or attractor for the rate of inflation. Empirically this works well for Japan and Germany, less so for the US and not at all for the UK. There appears to be strong evidence for the asymmetric adjustment of inflation in Japan, and some marginal evidence for it in Germany. If we condition on de-trended unemployment there is some evidence that unemployment has an asymmetric effect on both US and UK inflation.

Keywords: Relative price variability, inflation, asymmetry.