What Drives the Relationship Between Inflation and Price Dispersion? Market Power vs. Price Rigidity

Recent monetary search and Calvo-type models predict that the relationship between inflation and price dispersion is U-shaped, implying an optimal rate of inflation above zero. Moreover, monetary search models emphasize a critical dependence of the real effects of inflation on sellers’ market power, whereas Calvotype models suggest that the degree of price rigidity significantly affects the inflation - price dispersion nexus. Using a new set of highly disaggregated sectoral price data from a panel of European countries, this paper contributes to the literature by testing the empirical relevance of these two theoretical predictions. In line with monetary search theory, a U-shaped profile is found, provided that markups are sufficiently high, but the relationship breaks down under a more competitive environment. Contrarily, no evidence is found to support the contentions of Calvo-type models: U-shaped effects of inflation occur in product sectors with sticky as well as highly flexible prices.Inflation, Relative price variability, Price level index, Euro-area, Market structure, Monetary search model, Dynamic panel data models

A Theory of Social Interactions

This essay incorporates a general treatment of social interactions into the modern theory of consumer demand. Section 1 introduces the topic and explores some of the existing perspectives on social interactions and their importance in the basic structure of wants. In Section 2, various characteristics of different persons are assumed to affect the utility functions of some persons, and the behavioral implications are systematically explored. Section 3 develops further implications and applications in the context of analyzing intra-family relations, charitable behavior, merit goods and multi-persons interactions, and envy and hatred. The variety and significance of these applications is persuasive testimony not only to the importance of social interactions, but also to the feasibility of incorporating them into a rigorous analysis.