Nominal rigidities, skewness and inflation regimes

Abstract

The menu-costs model developed by Ball and Mankiw (BM) [Ball, L., Mankiw, N.G., 1994. Asymmetric price adjustment and economic fluctuations. Economic Journal 104 (423), 247–261; Ball, L., Mankiw, N.G., 1995. Relative-Price Changes as Aggregate supply shocks. Quarterly Journal of Economics 110 (1), 161–193] predicts that inflation is positively related to the skewness of price changes distribution. We test this prediction in different inflationary contexts: Spain (1975–2002) and Argentina (1960–1989). We find a positive inflation–skewness relationship in both countries at low inflation, even though the mean annual inflation rates were very different: 2.2% for Spain and 23% for Argentina. Therefore, the threshold of low inflation under which the menu-costs model is suitable is determined endogenously, and it depends on the inflationary experience of each economy. In the higher inflation periods skewness is not significant. Finally, our results suggest that the menu-costs model is not suitable beyond certain threshold of inflation.