Effect of inflation uncertainty on price dispersion in Iran

Abstract

This paper studies the inflation relationship analysis and inflation uncertainty with relative price’ dispersion in Iran by using the ordinary minimum squares method, during monthly data 1991:4-2012:12. In this paper, we used the GARCH technique in order to modeling and measuring the inflation uncertainty variable. The results show that inflation uncertainty increasing leads to increased relative price dispersion. Also unexpected inflation regardless of being positive or negative increases the relative price dispersion considerably, but the unexpected inflation decomposition to two positive and negative components and lack of considering them in the equation showed that each component is in a high significant level and cannot be considered for symmetric effect of positive or negative unexpected inflation. Corporations change their price against the positive unexpected inflation alternatively in responding to the inflation shocks and consequently the price will be fluctuated for reaching the balance strictly, therefore positive unexpected inflation cases have been increasing in relative price dispersion. In the other hand, corporations have no tendency for changing the goods’ price against the negative unexpected inflation. Also according to the results, inflation variable coefficient is significant from the statistical viewpoint and this means that this variable increases the relative dispersion considerably.