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The relationship between macroeconomic variables and relative price variability in Greek agriculture.

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Abstract

The purpose of this paper is to present a measure of relative price variability (RPV) among 53 agricultural products and to explore the relationships between RPV, aggregate inflation rate, and changes in economic activity for the period 1962-1997. We also estimate the effects of expected and unexpected components of inflation on price variability. The results show that changes in inflation rate and economic activity have a strong positive effect on RPV, in addition, expected inflation is found to be an important determinant for explaining price variability. (JEL E31, Q11)

Introduction

The relationship between inflation and relative price variability (RPV) has been examined by a large number of studies mainly in the US and the UK economy. Most of the studies have shown a strong positive relationship between inflation and variability of relative prices [Vining and Elwertowski, 1976; Parks, 1978; Cukierman, 1979, 1983; Fischer, 1981; Hercowitz, 1981; Hesselman, 1983; Marquez and Vining, 1984; Stockton, 1988; Debelle and Lamont, 1997]. (1) Specifically, the work of Vining and Elwertowski [1976], which has been widely cited, supports the view that greater instability of inflation is associated with greater relative price dispersion. Within the literature, inflation has been decomposed into anticipated and unanticipated components to allow for consideration of systematic, persistent processes and differential roles of inflation shocks, respectively. The work of Cukierman [1979] and Hercowitz [1981] has demonstrated that the unanticipated inflation rate is the most statistically significant explanatory variable for RPV. Fischer [1981] has found that both anticipated and unanticipated inflation had a positive and significant relationship with RPV. However, he argues that the calculation of price variability is dominated by food and energy shocks.

Two recent studies by Lapp and Smith [1992] and Smith and Lapp [1993] are the only ones that measure the RPV for the agricultural sector in the US and the UK, respectively, and examine the effects of macroeconomic instability on this variability measurement. Their findings are contradictory with respect to the effect of unanticipated inflation on RPV. Lapp and Smith found that there is a positive correlation between RPV and unanticipated inflation within the US agricultural sector. However, the same relationship did not appear in the UK agricultural sector. To the contrary, the anticipated part of inflation has a prominent role in determining price variability.

Most of the empirical work has been concentrated on the analysis of RPV for the whole economy by calculating it across various categories of products, which is known as the intermarket price variability. Under this terminology, RPV refers to the dispersion of the product's own inflation rates around an aggregate rate of inflation. On the other hand, the analysis of RPV for a given product across stores is known as intramarket price variability. Not much attention has been given to intramarket price variability presumably due to the lack of adequate data. (2)

The work presented in this paper is focused on the examination of the intermarket price variability. Existing empirical evidence conclude that expected inflation has a strong effect on intramarket price variability, while unexpected inflation has a strong effect on intermarket variability [Parks, 1978; Blejer and Leiderman, 1982; Domberger, 1987; Loy and Weaver, 1998; Lach and Tsiddon, 1993].

Following the work of Smith and Lapp, the aim of this paper is to introduce a measure of RPV across a set of Greek agricultural commodities for the period 1962-1997 and to determine the relationship between macroeconomic variables and RPV using conventional econometric methods.

The paper is organized as follows. The next section presents the...

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