Nominal rigidities, skewness and inflation regimes

Abstract

The menu-cost model developed by Ball and Mankiw predicts that inflation is positively related to the skweness of the price changes distribution. We test this prediction in different inflatinary contexts: Spain (1975-2002) and Argentina (1960-1989). We find a positive inflation-skweness relationship in both countries at low inflation, even though the mean annual inflation rates were very different: 2% for Spain and 23% for Argentina. Therefore, the threshold of low inflation under which the menu cost model is situated is determinated endogenously, and it depends on the inflationary experience of each economy. In the higher inflation periods skweness is not significant. Finally, our results suggest that the menu-cost model is not situable beyond certain threshold of inflation.