Firouzi Naeim, Peyman and Rahimzadeh, golnoush (2013): Inflation Skewness and Price Indexation.
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Abstract
One of the two price adjustment (indexation) schemes for the intermediate good producers, in the staggered price Dynamic Stochastic General Equilibrium (DSGE) models is the indexation to the average inflation. In this essay we show that using average of inflation as index multiplier may lead to the deviation from the optimal price for intermediate good producer. Although there is no problem with this indexation method as far as the distribution of inflation is symmetric, when we have a skewed distribution for inflation (as we have in the U.S. economy and most of the G7 countries), indexation to average inflation does not reflect the profit maximizer firm's decision making process. After showing the deficiencies of this method we introduce the Median of the distribution of inflation as an index multiplier, explain its advantage and support our claim by simulating the intermediate firm's profit, in two alternative scenarios of using average inflation and Median of the historic distribution of inflation. Our results suggest that using Median of historic distribution of inflation as index multiplier in staggered price framework, helps intermediate good producer to increase its profit.
Item Type: | MPRA Paper |
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Original Title: | Inflation Skewness and Price Indexation |
English Title: | Inflation Skewness and Price Indexation |
Language: | English |
Keywords: | DSGE; Inflation Skewness; Long run inflation; Non-Linearity; Calvo Pricing. |
Subjects: | E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy |
Item ID: | 52335 |
Depositing User: | Peyman Firouzi Naeim |
Date Deposited: | 11 Jan 2014 11:28 |
Last Modified: | 29 Sep 2019 04:48 |
References: | Aizenman, J., Hausmann, R., 1994. Why is inflation skewed? A debt and volatility story. National Bureau of Economic Research. Ascari, G., Ropele, T., 2009. Trend Inflation, Taylor Principle, and Indeterminacy. Journal of Money, Credit and Banking 41 (8), 1558 { 1584. Calvo, G. A., 1983. Staggered Prices in a Utility-Maximising Framework. Journal of Monetary Economics 12, 383{398. Christiano, L. J., Eichenbaum, M., Evans, C. L., 2005. Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113 (1), 1{45. Ruge-Murcia., F., 2012. Skewness Risk and Bond Prices. National Bureau of Economic Research. Schmitt-Groh, S., Uribe., M., 2004. Optimal Operational Monetary Plocy in the Christiano- Eichenbaum-Evans model of the U.S. Business Cycle. National Bureau of Economic Research. Yun, T., 1996. Nominal price rigidity, money supply Endogeneity and business cycle. Journal of Monetary Economics 37 (3), 345{370. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/52335 |
Available Versions of this Item
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Inflation Skewness and Price Indexation. (deposited 21 Apr 2013 00:14)
- Inflation Skewness and Price Indexation. (deposited 11 Jan 2014 11:28) [Currently Displayed]