Inflation, Inflation Uncertainty and the Relative Prices Dispersion in Iran

The present paper examines the relationship between inflation and inflation uncertainty with relative price dispersion using monthly data over the period of 1991-2012. In this context, the GARCH technique for modeling and calculatoin of the inflation uncertainty is applied.The results show that the increase in inflation uncertainty increases the dispersion of relative prices. Also, regardless of the positive and negative unexpected inflation, the dispersion of relative prices significantly increases. But, the analysis of both positive and negative unexpected inflation and considering them as part of the equation shows that both are significant at a high level. The positive and the negative effects of unexpected inflation cannot be considered symmetrical. In response to positive unexpected inflation shocks firms change the prices, alternately. Hence, positive inflation unexpectedly increases the dispersion of relative prices. On the other hand, firms against the unexpected negative inflation do not change their prices. So, the negative unexpected inflation reduces the dispersion in relative prices. It also concluded that the inflation variable coefficients are statistically significant at a high level. This means that the positive unexpected inflation increases considerably the dispersion of relative prices.