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Relative Price Variability

814 Words4 Pages

ANDI HASLINDA BT ANDI BASA 1122152
NADIAH HANIM BT MOKHTARUDIN 1122156

Inflation and Relative Price Variability: Further Evidence from Malaysia

This article study on relevance of inflation and relative price variability while taking into account some other aspects of inflation which are inflation uncertainty, expected inflation and unexpected inflation. (RVP).

There are three well-developed theories that imply a relationship between RPV and inflation. These are (i) the menu-costs model of Sheshinski and Weiss (1977) and Rotemberg (1983), (ii) the signal-extraction model of Lucas (1972, 1973) and Barro (1976), (iii) the extension of the signal-extraction model by Hercowitz (1981) and Cukierman (1983). Each of these makes a distinct …show more content…

It usually had used since 1994. Rate of inflation for the each commodity is different from time to time even from one year to another year. The inflation of one commodity for one period of time was identified by using log difference of index. The variance of sub-indexes inflation rates around the overall inflation rate is a definition of RPV. Measurement of the RPV is based on unweight product (Aarstol, 1999; Tang and Wang, 1993).

Besides, based on the data that will be obtained through the RPV, there are two types of inflation to be obtained which is expected and unexpected inflation. Expectations of inflation analyzed on how huge an problem is if a given policy action taken by the Fed who will have involved in economic activity while unexpected inflation is a situation in which the inflation rate is higher than economists, regulators or others …show more content…

It is more appropriate by using that measurement of weighted RPV. It means that in this study, the way of estimating data of RPV depends on two measurements which are weighted and unweighted of RPV. For modeling the pattern of inflation, combination of ARMA and low order of GARCH is used (Aarstol, 1999; Becker and Nautz, 2009). To find more accurate and precise data of inflation, Maximum-Likelihood Estimation had been applied as it can minimize AIC and form the best lag structure of inflation data.

From this article, we can conclude that both expected and unexpected are two parts of inflation which can help us to better explain in this relationship in which it can contribute to RPV, while inflation uncertainty has no significant effect on RPV. That means menu cost theory and expansion of signal extraction are better in explaining this relationship than signal extraction theory. Furthermore, in this study, measure of RPV is useful to link between inflation and RPV and can contribute to government macroeconomic policies as it develop some new aspects of relationship between inflation and RPV in Malaysia. Lastly, we can see that a low or stable rate of
Inflation can reduce RPV and help to minimize its negative effects on

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