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Inflation Dynamics’ Micro Foundations: How Important is Imperfect Competition Really?

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Author Info
Jose A. Murillo
Sara G. Castellanos
Abstract

This paper analyzes price formation and dynamics according to the industry structure. It divides manufacturing industries of Mexico into two groups: perfectly and imperfectly competitive. The results show that imperfectly competitive industries predominate. Then this classification is used to build consumer price sub indexes for the goods of both sectors. These sub indexes’ inflation dynamics indicate that the exchange rate pass-through in the perfectly competitive sector is significantly higher than in the imperfectly competitive sector, while wage pass-through only affects the imperfectly competitive sector. Also, that inflation inertia is lower in the former than in the latter; adding up in more volatility of the perfectly competitive inflation rate. For policy makers an interesting feature of the perfectly competitive price index is that the evidence suggests that its variations precede those of the imperfectly competitive price index. For economic theorists these features validate recent macroeconomic models with heterogeneous price setting behavior

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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 78.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:78

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Related research
Keywords: Panzar-Rosse; Industry Structure; Inflation; Price Dynamics; Price Indexes;

Find related papers by JEL classification:
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
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