RELATIVE PRICE DISPERSION, AGGREGATE PRICE MOVEMENT, AND THE NATURAL RATE OF UNEMPLOYMENT

Abstract

This paper develops a model of relative price stickiness and examines its implications for the relationship between relative prices, inflation, and the natural rate of unemployment. Estimation of the model demonstrates that causality in the relationship between relative and aggregate prices runs in both directions. However, microeconomic disturbances have been the primary source of relative price change variance over the postwar period, and these micro disturbances have exerted a strong effect on inflation in the short run. It also is shown that micro relative price change dispersion has had a significant influence on the natural rate of unemployment.

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