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Structural change, de-industrialization and inflation inertia in Brazil

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  • André Roncaglia de Carvalho

    ()

Abstract

The paper focuses some of the non-monetary structural causes of inflationary persistence in Brazil in the post-Real plan period. A connection is made between the de-industrializing trend and the emergence of primary pressures that set a floor to inflation levels. The framework is set up in terms of inter-sector dynamics in a widely indexed economic setting. Two primary pressures are taken into account, namely: (i) the increase in the services sector´s share of total value added in aggregate output combined with (ii) the change in the behavior of Statesupervised prices. Departing from a simple inflation accounting exercise and the structuralist assumption of price rigidity, a connection is made between relative price changes and the inflation rate. Volatility of the exchange rate affects the composition of aggregate supply and the ratio between prices of tradable and non-tradable goods; if prices display some degree of downward inflexibility, such volatility yields price increases in some sectors not offset by proportional price decreases in other sectors. A self-sustaining trend of cost-shift inflation is thus explained on the basis of exchange-rate-fueled structural changes with a bias towards labor-intensive sectors. The sluggish innovating thrust in these sectors sets limits to increases in labor productivity, while labor market regulations and widespread indexation render prices inflexible downwards. Empirical evidence is then garnered to support the analytical claim that de-industrialization engenders a floor to inflation rates.

Suggested Citation

  • André Roncaglia de Carvalho, 2014. "Structural change, de-industrialization and inflation inertia in Brazil," Working Papers, Department of Economics 2014_29, University of São Paulo (FEA-USP).
  • Handle: RePEc:spa:wpaper:2014wpecon29
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    File URL: http://www.repec.eae.fea.usp.br/documentos/AndreRoncaglia_29WP.pdf
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    References listed on IDEAS

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    1. Afonso S Bevilaqua & Mário Mesquita & André Minella, 2008. "Brazil: taming inflation expectations," BIS Papers chapters,in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 139-158 Bank for International Settlements.
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    3. Frenkel, Roberto & Ros, Jaime, 2006. "Unemployment and the real exchange rate in Latin America," World Development, Elsevier, vol. 34(4), pages 631-646, April.
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    5. Cardoso, Eliana A., 1981. "Food supply and inflation," Journal of Development Economics, Elsevier, vol. 8(3), pages 269-284, June.
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    7. A. P. Thirlwall, 2013. "Economic Growth in an Open Developing Economy," Books, Edward Elgar Publishing, number 15208, June.
    8. Campêlo, Ana Katarina & Cribari-Neto, Francisco, 2003. "Inflation Inertia and Inliers: The Case of Brazil," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 57(4), October.
    9. Nelson H. Barbosa-Filho, 2009. "Inflation Targeting in Brazil: 1999–2006," Chapters,in: Beyond Inflation Targeting, chapter 7 Edward Elgar Publishing.
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    More about this item

    Keywords

    de-industrialization; inflation inertia; structural change; downward rigidity; Brazil;

    JEL classification:

    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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