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Inertial Inflation, Indexation and Price Stickiness: Evidence from Brazil

  • Durevall, Dick

    ()

    (Department of Economics, School of Economics and Commercial Law, Göteborg University)

This paper evaluates the inertial inflation hypothesis for Brazil during the 1970s and the first half of the 1980s. According to this hypothesis, (wage) indexation created a feedback mechanism such that one-time supply shocks were fully transmitted into permanent increases in inflation. First a simple theoretical model is used to show that the hypothesis is based on the assumption of perfect price flexibility. When price stickiness is introduced, indexation does not produce inertial inflation. Then, to investigate the impact of indexation on inflation, the degree of inertia (persistence) is compared between two periods, one with widespread indexation (1969-1985) and an earlier one without indexation (1945-1963). Unit root tests and the variance ratio test are used. The variance ratio test is also applied to inflation in the U.S. for the period (1969-1985) and France for (1983-1993), a period when there was no wage indexation. Finally, vector-autoregressive representations are estimated for the period 1972-1985. They differ from earlier work in that price tickiness is allowed for. The empirical results do not support the inertial inflation hypothesis; inertia does not seem to have been unusually high during the period of indexation, and impulse response analysis indicates that inflation shocks had only short-run effects on the level of inflation.

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Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 8.

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Length: 25 pages
Date of creation: 13 Oct 1998
Date of revision:
Publication status: Published in Journal of Development Economics, 1999, pages 407-421.
Handle: RePEc:hhs:gunwpe:0008
Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/

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  1. John Y. Campbell & N. Gregory Mankiw, 1986. "Are Output Fluctuations Transitory?," NBER Working Papers 1916, National Bureau of Economic Research, Inc.
  2. Persio Arida & André Lara Resende, 1985. "Inertial inflation and monetary reform in Brazil," Textos para discussão 85, Department of Economics PUC-Rio (Brazil).
  3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  4. Novaes, Ana Dolores, 1993. "Revisiting the inertial inflation hypothesis for Brazil," Journal of Development Economics, Elsevier, vol. 42(1), pages 89-110, October.
  5. Cardoso, Eliana A & Dornbusch, Rudiger, 1987. "Brazil's Tropical Plan," American Economic Review, American Economic Association, vol. 77(2), pages 288-92, May.
  6. Cardoso, Eliana A., 1983. "Indexação e acomodação monetária: um teste do processo inflacionário brasileiro," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 37(1), January.
  7. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  8. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  9. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
  10. Jorge Marshall & Felipe Morandé, 1989. "Una Interpretación Keynesiana- Inercialista de la Inflación Brasileña en los Años Ochenta," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 26(79), pages 353-366.
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