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Price Setting during Low and High Inflation: Evidence from Mexico

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  • Etienne Gagnon

    () (Economics Northwestern University)

Abstract

This paper provides new insight into the relationship between inflation and consumer price setting by examining a large data set of Mexican consumer prices covering episodes of both low and high inflation, as well as the transition between the two. The overall portrait is one in which the economy shares several characteristics of time dependent models when the annual inflation rate is low (below 10-15%), while displaying strong state dependence when inflation is high (above 10-15%). At low inflation levels, the aggregate frequency of price changes responds little to movements in inflation because movements in the frequency of price decreases partly offset movements in the frequency of price increases. When the annual inflation rate is above 10-15 percent, however, there are no longer enough price decreases to counterbalance price increases, making the frequency of price changes much more responsive to inflation. In this case, a 1-percent increase in the annual inflation rate is associated with a 0.40-0.45-percentage-points increase in the monthly frequency of price changes for consumer goods.

Suggested Citation

  • Etienne Gagnon, 2006. "Price Setting during Low and High Inflation: Evidence from Mexico," 2006 Meeting Papers 300, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:300
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    More about this item

    Keywords

    Price setting; consumer prices; frequency of price changes; time-dependent pricing; state-dependent pricing.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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