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End of the line: Relative Price Variability and Inflation in a Fixed Price Regime

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  • Rodrigo Cerda
  • Rolf Lüders

Abstract

We study the relation between inflation rate and relative price variability using data of prices on 23 disaggregated food items since 1960 to 2003 in Chile. The behavior of inflation rate is quite variable in that country during that time span and more interestingly, there are periods of time in which prices were determined (fixed) by the economic authorities. We find consistent evidence that a larger inflation rate causes a larger relative price variability and this effect is much larger in periods in which prices were fixed. We interpret that result as firms over-reacting to inflation when setting their relative prices if they assume that it is unlikely to reset their prices in the near future. That result holds even if we follow different econometric approaches and it holds for all the food products considered.

Suggested Citation

  • Rodrigo Cerda & Rolf Lüders, 2011. "End of the line: Relative Price Variability and Inflation in a Fixed Price Regime," Documentos de Trabajo 395, Instituto de Economia. Pontificia Universidad Católica de Chile..
    • Handle: RePEc:ioe:doctra:395
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    References listed on IDEAS

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    1. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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