The Relevance of Supply Shocks for Inflation: The Spanish Case

Abstract

This paper analyses the effects of supply shocks on the Spanish inflation rate. The methodology applied is based on Ball and Mankiw (1995). These authors assume that a good proxy for supply shocks is the third moment of the distribution of price changes, and show that nominal rigidities imply a positive relation between inflation and skewness, which is magnified by the variance of the distribution. The main data used are the monthly consumer price indexes of each region, disaggregated in 57 categories, for the 1993-2005 period. We estimate the relation between mean inflation and the higher moments of the distribution, including several control variables (rate of unemployment, industrial production index, general retail trade index, shopping mall retail trade index, oil prices and industrial price index). The analysis has been carried out in two ways: firstly, each region is analysed separately and, secondly, we use panel data techniques in order to test the homogeneity across regions. Our results point out that Spanish regions show a common pattern with regard to the nominal rigidities confronted, and that Spanish inflation is vulnerable to supply shocks.