Relative Price Dispersion Research Articles

Relative price variability: Evidence from supply and demand events

Previous studies of relative price variability assume that all supply changes are unanticipated or that supply elasticities are equal across markets. In this paper, we extend these models by relaxing these restrictive assumptions. Our resulting theoretical expression for relative price dispersion reveals an independent role for unanticipated and anticipated supply events. Subjecting our model to empirical testing, we find that this dichotomy of supply shocks is not rejected by the data for the period 1970–1981.

Relative Price Dispersion and Economic Shocks: An Inventory-Adjustment Approach

THE ISSUE OF RELATIVE PRICE DISPERSION (RPD) has gained prominence in recent years, as the economy was subject to economic shocks and to high and variable levels of inflation. The concern about the increased RPD was due to its potentially harmful effect on the economy. Recently, Blejer and Leiderman [4] evaluated empirically the effect of RPD on economic activity in the postwar United States and found that increased RPD leads to a decrease in the level of output and to an increase in the rate of unemployment. Israelsen and McDonald [13] showed, in a partial equilibrium context, that when wage changes are firmly linked to the general price level, and labor mobility between markets (or industries) is limited, an increase in RPD may lead to increasing unemployment. Pischer [10] suggested that RPD is not necessarily harmful; but when coupled with unexpected inflation, it may be associated with information confusion, leading to a loss through the misallocation of resources. These concerns have raised the interest in understanding the factors causing and affecting RPD, both theoretically and empirlcally. The prevailing theoretical explanations of the factors affecting RPD are based on two main approaches. C)ne approach is based on misinformation-type models, inspired by Lucas's work [14], where individuals are confused between aggregate shocks and relative, marketspecific ones. Barro [3] and Cukierman and Wachtel [9] have proposed that the greater the vanance of the aggregate shocks, the greater the RPD. Barro [3, pp.

A proposition on short-run departures from the law-of-one-price: Unanticipated inflation, relative-price dispersion, and commodity arbitrage

This paper proposes an explanation of short-run departures from the law-of-one-price based on the characteristics of the inflationary process and changes in the distribution of relative prices. Unexpected inflation gives rise to volatility of relative prices. The more unexpected (and hence uneven) the rate of inflation, the greater the difficulty in discerning from a given structure of relative prices commodity-arbitrage opportunities which may be expected to persist and those transient opportunities which do not warrant a firm's incurring fixed costs of arbitrage. An illustration portrays a risk-averse firm confronting an international arbitrage opportunity.

The dispersion of relative commodity prices under very rapid inflation

The hypothesis that inflation is not neutral with respect to relative commodity prices has recently received a great deal of attention. In this paper the recent experience of Argentina, a country suffering from a very high rate of inflation, is considered. It is found that the increase in relative-price variability which is associated with higher rates of inflation is caused mainly by ‘surprises’ or unanticipated changes in the inflation rate and that fully expected inflation appears to have less or no relative-price effects. An additional result indicates that increased variability of relative commodity prices have effects on financial portfolio composition, reducing the holdings of real cash balances.

Money and the Dispersion of Relative Prices

A price dispersion equation is tested with data from the German hyper-inflation. The equation is derived from a version of Lucas' (1973) and Barro's (1976) partial information-localized market models. In this extension, different excess demand elasticities across commodities imply a testable dispersion equation, in which the explanatory variable is the magnitude of the unperceived money growth. The testing of this hypothesis requires two preliminary steps. First, a price dispersion series is computed using an interesting set of data. It consists of monthly average wholesale prices of 68 commodities ranging from foods to metals, for the period of January, 1921 to July, 1923. The next step is the delicate one of measuring unperceived money growth. This estimation implies the postulation of an available information set and also a function relating the variables in this set to money creation. The function used was based on considerations related to government demand for revenue. The model receives support from the empirical analysis although it is evident that unincluded variables have important effects on price dispersion.