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

  • Manuel Ramos Francia
  • Alberto Torres García
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    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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    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
    Contact details of provider: Web page: http://www.banxico.org.mx

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    1. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
    2. 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 66, National Bank of Belgium.
    3. Athanasios Orphanides & Simon van Norden, 2003. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," CIRANO Working Papers 2003s-01, CIRANO.
    4. Manuel Ramos Francia & Daniel Chiquiar & Antonio E. Noriega, 2007. "Time Series Approach to Test a Change in Inflation Persistence: The Mexican Experience," Working Papers 2007-01, Banco de México.
    5. BAI, Jushan & PERRON, Pierre, 1998. "Computation and Analysis of Multiple Structural-Change Models," Cahiers de recherche 9807, Universite de Montreal, Departement de sciences economiques.
    6. Sbordone, Argia, 1998. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Seminar Papers 653, Stockholm University, Institute for International Economic Studies.
    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, vol. 43(3), pages 655-679, June.
    8. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
    9. Rudebusch, G.D. & Svensson, L.E.O., 1998. "Policy Rules for Inflation Targeting," Papers 637, Stockholm - International Economic Studies.
    10. Manuel Ramos Francia & Alberto Torres García, 2005. "Reducing Inflation Through Inflation Targeting: The Mexican Experience," Working Papers 2005-01, Banco de México.
    11. 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.
    12. Peter J. Klenow & Oleksiy Kryvtsov, 2005. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," NBER Working Papers 11043, National Bureau of Economic Research, Inc.
    13. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
    14. Ali Dib & Mohamed Gammoudi & Kevin Moran, 2005. "Forecasting Canadian Time Series with the New-Keynesian Model," Cahiers de recherche 0527, CIRPEE.
    15. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    16. 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.
    17. Edith Gagnon & Hashmat Khan, 2001. "New Phillips Curve with Alternative Marginal Cost Measures forCanada, the United States, and the Euro Area," Staff Working Papers 01-25, Bank of Canada.
    18. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    19. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
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