In search of price rigidities : recent sector evidence from Argentina
The hypothesis that the price adjustment to nominal shocks is instantaneous has been part of the monetarist approach explaining the inflationary process in Argentina. But the authors argue that monetary and exchange rate policies have had different effects on relative prices and thus have a significant influence on the real side of the economy. The existence of rigidities has prevented full and instantaneous price adjustments. Recent work on inflation in imperfectly competitive markets explain rigidities as a consequence of firms'strategic responses to nominal shocks, which in turn depend on the market structure and demand elasticities faced by firms. Price rigidities emerge when firms facing changes in aggregate demand behave collusively, and there are costs for customers to switch between suppliers. In contrast, when the costs for customers to switch between suppliers are low, firms are obliged to adjust their prices to new demand conditions, otherwise they will lose their customers. Changes in foreign prices affect domestic prices depending on the degree of foreign competition and the price formation mechanism in each sector. As expected, price rigidities are minimal in tradable sectors where firms react to these changes by changing their prices almost instantaneously. The response in nontradable activities depends on indirect effects and whether prices are indexed to a foreign currency. Because understanding this is essential for effective policymaking, the authors analyze price behavior of four economic sectors - agriculture, industry, (retail) commerce, and services - in Argentina from 1981-94. The econometric analysis show large differences in the price behavior across sectors. Firms do not respond uniformly to changes in production costs, foreign prices, and demand conditions. The response of individual prices reflects the distribution of adjustment costs across sectors in the case of nominal shocks. To maintain social and political stability, the government's challenge is to minimize divergence across sectors. Increasing competition appears to be a crucial element of this strategy since monopolistic power is frequently associated with the existence of price rigidities.
|Date of creation:||31 Dec 1995|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hercowitz, Zvi, 1981.
"Money and the Dispersion of Relative Prices,"
Journal of Political Economy,
University of Chicago Press, vol. 89(2), pages 328-356, April.
- Zvi Hercowitz, 1980. "Money and the Dispersion of Relative Prices," NBER Working Papers 0431, National Bureau of Economic Research, Inc.
- Steven B. Kamin & Neil R. Ericsson, 1993. "Dollarization in Argentina," International Finance Discussion Papers 460, Board of Governors of the Federal Reserve System (U.S.).
- Chevalier, Judith A & Scharfstein, David S, 1995. "Liquidity Constraints and the Cyclical Behavior of Markups," American Economic Review, American Economic Association, vol. 85(2), pages 390-396, May.
- Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-1188, December.
- Alberto Alesina & Allan Drazen, 1989. "Why are Stabilizations Delayed?," NBER Working Papers 3053, National Bureau of Economic Research, Inc.
- Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1558. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.