Price flexibility in developing countries: evidence and implications

Using data for a sample of 50 developing countries, the empirical investigation evaluates determinants and implications of asymmetric price flexibility. Price inflation is characterized by high flexibility to adjust towards full equilibrium. Further, price inflation accelerates flexibly with unanticipated demand growth, in both the upward and downward directions, in most of the countries under investigation. Asymmetry indicates higher upward flexibility compared to downward flexibility in many countries. Aggregate uncertainty determines the degree of asymmetry such that price flexibility is higher with respect to expansionary demand shocks, compared to contractionary shocks, the higher the variability of aggregate demand across countries. In contrast, higher trend price inflation increases downward price flexibility. Across countries, output variability decreases with both upward and downward price flexibility in the face of aggregate demand shocks.