Premium
On the Asymmetric U‐Shaped Relationship between Inflation, Inflation Uncertainty, and Relative Price Skewness in the UK
Author(s) -
CHAUDHURI KAUSIK,
GREENWOODNIMMO MATTHEW,
KIM MINJOO,
SHIN YONGCHEOL
Publication year - 2013
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12058
Subject(s) - skewness , economics , inflation (cosmology) , relative price , econometrics , monetary policy , calibration , standard deviation , inflation targeting , monetary economics , mathematics , statistics , physics , theoretical physics
We investigate the asymmetric relationships between aggregate inflation and the second and third moments of the cross‐sectional distribution of relative prices using a modified Calvo pricing model with regime‐dependent price rigidities. Calibration experiments reveal that the inflation‐standard deviation and inflation‐skewness relationships exhibit U‐shaped asymmetries around the historical mean inflation rate. UK sectoral data support our results. We conclude that monetary policy should target an inflation rate proximate to the (common) minima of these nonlinear relationships and that core inflation measures should not be used for policy purposes as they exclude much of the information contained in the higher moments.