Inertial Inflation, Indexation and Price Stickiness: Evidence from Brazil

Dick Durevall ()
Additional contact information
Dick Durevall: Department of Economics, School of Economics and Commercial Law, Göteborg University, Postal: Department of Economics., School of Economics and Commercial Law, Göteborg University, Box 640, SE 405 30 GÖTEBORG

No 8, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: This paper evaluates the inertial inflation hypothesis for Brazil during the 1970s and the first half of the 1980s. According to this hypothesis, (wage) indexation created a feedback mechanism such that one-time supply shocks were fully transmitted into permanent increases in inflation. First a simple theoretical model is used to show that the hypothesis is based on the assumption of perfect price flexibility. When price stickiness is introduced, indexation does not produce inertial inflation. Then, to investigate the impact of indexation on inflation, the degree of inertia (persistence) is compared between two periods, one with widespread indexation (1969-1985) and an earlier one without indexation (1945-1963). Unit root tests and the variance ratio test are used. The variance ratio test is also applied to inflation in the U.S. for the period (1969-1985) and France for (1983-1993), a period when there was no wage indexation. Finally, vector-autoregressive representations are estimated for the period 1972-1985. They differ from earlier work in that price tickiness is allowed for. The empirical results do not support the inertial inflation hypothesis; inertia does not seem to have been unusually high during the period of indexation, and impulse response analysis indicates that inflation shocks had only short-run effects on the level of inflation.

Keywords: Brazil; indexation; inertia; inflation; price stickiness (search for similar items in EconPapers)
JEL-codes: E31 N16 (search for similar items in EconPapers)
Pages: 25 pages
Date: 1998-10-13
New Economics Papers: this item is included in nep-eec and nep-mon
References: Add references at CitEc
Citations:

Published in Journal of Development Economics, 1999, pages 407-421.

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Inertial inflation, indexation and price stickiness: evidence from Brazil (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:gunwpe:0008

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers in Economics from University of Gothenburg, Department of Economics Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Jessica Oscarsson ().