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Inflation Dynamics in Mexico: A Characterization Using the New Phillips Curve

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  • Manuel Ramos Francia
  • Alberto Torres García
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    Abstract

    The paper describes the dynamics of inflation in the Mexican economy from 1992 to 2006 using the New Phillips curve framework. The purpose is to identify key structural characteristics of the economy (structural parameters) that define the short-run dynamics of inflation. Results show that despite a previous history of high inflation, a hybrid version of the New Phillips curve fits the data well for the period 1992-2006. The short-run dynamics of inflation in Mexico are best described when both backward and forward looking components are considered. In addition, estimates for the sub-sample 1997-2006 show that as inflation has fallen, on average, prices remain fixed for a longer horizon, the fraction of firms that use a backward looking rule of thumb to set their price decreases and the forward looking component of the inflation process gains importance.

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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7BDF19BE24-9E61-2159-B065-1BD2F3D76FAE%7D.pdf
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    Bibliographic Info

    Paper provided by Banco de México in its series Working Papers with number 2006-15.

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    Date of creation: Dec 2006
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    Handle: RePEc:bdm:wpaper:2006-15

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    Web page: http://www.banxico.org.mx
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    Keywords: Inflation dynamics; Phillips Curve;

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    References

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    1. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(2), pages 195-222, October.
    2. Troy Matheson, 2006. "Phillips curve forecasting in a small open economy," Reserve Bank of New Zealand Discussion Paper Series DP2006/01, Reserve Bank of New Zealand.
    3. Edith Gagnon & Hashmat Khan, 2001. "New Phillips Curve with Alternative Marginal Cost Measures forCanada, the United States, and the Euro Area," Working Papers, Bank of Canada 01-25, Bank of Canada.
    4. Ali Dib & Mohamed Gammoudi & Kevin Moran, 2006. "Forecasting Canadian Time Series With the New-Keynesian Model," Working Papers Central Bank of Chile, Central Bank of Chile 382, Central Bank of Chile.
    5. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
    6. Luc Aucremanne & Emmanuel Dhyne, 2005. "Time-dependent versus State-dependent Pricing: A Panel Data Approach to the Determinants of Belgian Consumer Price Changes," Working Paper Research, National Bank of Belgium 66, National Bank of Belgium.
    7. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(3), pages 655-679, June.
    8. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters, in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
    9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
    10. Carlos Capistrán & Manuel Ramos-Francia, 2009. "Inflation Dynamics In Latin America," Contemporary Economic Policy, Western Economic Association International, vol. 27(3), pages 349-362, 07.
    11. Sbordone, A.M., 1998. "Prices and Unit Labor Costs: a New Test of Price Stickiness," Papers, Stockholm - International Economic Studies 653, Stockholm - International Economic Studies.
    12. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    13. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
    14. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
    15. Manuel Ramos Francia & Alberto Torres García, 2005. "Reducing Inflation Through Inflation Targeting: The Mexican Experience," Working Papers, Banco de México 2005-01, Banco de México.
    16. Athanasios Orphanides & Simon van Norden, 2003. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," CIRANO Working Papers, CIRANO 2003s-01, CIRANO.
    17. Peter J. Klenow & Oleksiy Kryvtsov, 2005. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Working Papers, Bank of Canada 05-4, Bank of Canada.
    18. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    19. Daniel Chiquiar & Antonio Noriega & Manuel Ramos-Francia, 2010. "A time-series approach to test a change in inflation persistence: the Mexican experience," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 42(24), pages 3067-3075.
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    Cited by:
    1. Carlos Capistrán & Manuel Ramos Francia, 2006. "Inflation Dynamics in Latin America," Working Papers, Banco de México 2006-11, Banco de México.
    2. José J. Sidaoui & Manuel Ramos-Francia, 2008. "The monetary transmission mechanism in Mexico: recent developments," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 363-394 Bank for International Settlements.

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