English, Article, Journal or magazine article edition: Price Setting during Low and High Inflation: Evidence from Mexico Etienne Gagnon

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Price Setting during Low and High Inflation: Evidence from Mexico
Author
  • Etienne Gagnon
Physical Description
  • preprint
Notes
  • 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. Overall, the economy shares several characteristics with 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 rises beyond 10-15 percent, however, there are no longer enough price decreases to counterbalance the rising occurrence of price increases, making the frequency of price changes more responsive to inflation. It is shown that a simple menu-cost model with idiosyncratic technology shocks predicts remarkably well the level of the average frequency and magnitude of price changes over a wide range of inflation.
  • Inflation (Finance) - Mexico ; Pricing - Mexico
  • RePEc:fip:fedgif:896
  • 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.
  • Price setting, consumer prices, frequency of price changes, time-dependent pricing, state-dependent pricing.
  • RePEc:red:sed006:300
Language
  • English
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