Inflation Dynamics’ Micro Foundations: How Important is Imperfect Competition Really?

Jose A. Murillo and Sara Castellanos

No 78, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: This paper analyzes price formation and dynamics according to the industry structure. It divides manufacturing industries of Mexico into two groups: perfectly and imperfectly competitive. The results show that imperfectly competitive industries predominate. Then this classification is used to build consumer price sub indexes for the goods of both sectors. These sub indexes’ inflation dynamics indicate that the exchange rate pass-through in the perfectly competitive sector is significantly higher than in the imperfectly competitive sector, while wage pass-through only affects the imperfectly competitive sector. Also, that inflation inertia is lower in the former than in the latter; adding up in more volatility of the perfectly competitive inflation rate. For policy makers an interesting feature of the perfectly competitive price index is that the evidence suggests that its variations precede those of the imperfectly competitive price index. For economic theorists these features validate recent macroeconomic models with heterogeneous price setting behavior

Keywords: Panzar-Rosse; Industry Structure; Inflation; Price Dynamics; Price Indexes (search for similar items in EconPapers)
JEL-codes: E31 E32 E58 L16 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-ifn and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:latm04:78

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