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Friedman's Hypothesis and Cross-Regional Inflation Dispersion

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  • Shoesmith, Gary L.

Abstract

This study shows that higher inflation is associated with increased inflation dispersion across U.S. cities and regions. Regression analysis indicates that cross-regional inflation variability is positively related to both inflation and inflation expectations based on consumer price inflation for 18 U.S. cities. Similar results are obtained after excluding five of the 18 cities that may be disproportionately impacted by energy shocks. In addition, cointegration analysis shows greater cross-regional price dispersion over time during the higher inflation period of 1978-1987 than during 1988-1997. These findings suggest that high inflation is associated with greater uncertainty for businesses and policy makers.

Suggested Citation

  • Shoesmith, Gary L., 2007. "Friedman's Hypothesis and Cross-Regional Inflation Dispersion," Review of Applied Economics, Lincoln University, Department of Financial and Business Systems, vol. 3(1-2), pages 1-11.
    • Handle: RePEc:ags:reapec:50156
    DOI: 10.22004/ag.econ.50156
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    References listed on IDEAS

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    1. Stanley Fischer, 1981. "Relative Shocks, Relative Price Variability, and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 381-442.
    2. Søren Johansen & Katarina Juselius, 1989. "The Full Information Maximum Likelihood Procedure for Inference on Cointegration - with Applications," Discussion Papers 89-11, University of Copenhagen. Department of Economics.
    3. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    4. Debelle, Guy & Lamont, Owen, 1997. "Relative Price Variability and Inflation: Evidence from U.S. Cities," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 132-152, February.
    5. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    6. Friedman, Milton, 1977. "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 451-472, June.
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