Relative Price Variability and Inflation -New International Empirical Evidence-

Numerous studies have been made on relative price variability (RPV), which is an important concept used to explain the sources and costs of inflation. Signal extraction model and menu costs theory are two main theories to explain the relationship between RPV and inflation in most studies. Various empirical methods from simple regression to vector autoregression have been employed to show the effects of RPV on inflation. Price data for most RPV analysis in the past have come from advanced economies such as the U.S., U.K., and Japan. This paper surveys new empirical studies on RPV after 2000 considering the data of other countries such as Nigeria, China, and Turkey as well as the U.S. and U.K. to verify that the relationship between RPV and inflation is supported by international empirical evidence. Despite the variety of results from these studies, RPV and inflation are positively related in the majority of countries in the survey.