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Price Setting in the Argentine and Colombian Manufacturing Industry

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  • Juán Carlos Echeverry

Abstract

A price-setting mechanism based on a markup over variable costs is studied for the quite different inflationary experiences of Argentina and Colombia. The paper pursues a twofold strategy: first,it tests the null hypothesis of a constant markup against the alternative of a variable one; second, it checks the sensitivity of the price setting mechanism to strong shifts in the amcroeconomic environmente. The model explains price seeting during periods of moderate and high inflation in both countries. However, it is less powerful for the period of price stability in Argentina. Finally, markups seem to be constant for all types of inflationary experiences except hyperinflation. This stands in contrast to a body of literature that has found a negative relationschip between markups and inflation for OECD countries. The estimation shed light on other interesting issues: productivity has become a crucial determinant of prices for Argentianian manufacturing firms during the period of stability and opening of the economy;in contrast, the results suggest a weak impact of the opening on Colombian firms.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 090.

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Handle: RePEc:bdr:borrec:090

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  1. Tommasi, Mariano, 1994. "The Consequences of Price Instability on Search Markets: Toward Understanding the Effects of Inflation," American Economic Review, American Economic Association, vol. 84(5), pages 1385-96, December.
  2. Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  3. Mariano Tommasi, 1993. "The Consequences of Price Instability on Search Markets," UCLA Economics Working Papers 700, UCLA Department of Economics.
  4. Robert E. Hall, 1986. "Market Structure and Macroeconomic Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 285-338.
  5. Benabou, Roland & Gertner, Robert, 1993. "Search with Learning from Prices: Does Increased Inflationary Uncertainty Lead to Higher Markups?," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 69-94, January.
  6. Kaskarelis, Ioannis A, 1993. "Inflation and the Mark-Up in UK Manufacturing Industry," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(4), pages 391-407, November.
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