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

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  • 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

Suggested Citation

  • Jose A. Murillo & Sara G. Castellanos, 2004. "Inflation Dynamics’ Micro Foundations: How Important is Imperfect Competition Really?," Econometric Society 2004 Latin American Meetings 78, Econometric Society.
    • Handle: RePEc:ecm:latm04:78
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    References listed on IDEAS

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    Keywords

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    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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