Price variability and price dispersion in a stable monetary environment: evidence from German retail markets. Managerial and Decision Economics, this issue

Abstract: We investigate the relationship between inflation and price variation using highly dis-aggregated, weekly price data for consumption goods recorded in Germany during 1995, a low inflation period. We find a significant positive correlation between the rates of price change and price dispersion, both at the level of individual products and product groups. However, we find no correlation between the rates of price change and price variability. Together with results from similar studies, Tommasi (1993) and Parsley (1996), a remarkable pattern emerges: When aggre-gate nominal shocks are small, only price dispersion is correlated with price changes. As the rate of inflation rises, both variability and dispersion become affected. During hyperinflation, system-atic movements of price dispersion seem to disappear. We conclude that price dispersion is best explained by microeconomic frictions in price adjustment, whereas price variability appears to be related to costly price search and information problems