Inflation Thresholds and Relative Price Variability: Evidence from U.S. Cities

Alexander Bick · Dieter Nautz

39 citations0/0 files storedInternational journal of central banking

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Monetary Policy and Economic Impact Market Dynamics and Volatility Economic theories and models

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.

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References

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