Commented by Jose Ricardo da Costa e Silva Central Bank of Brazil
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Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting
Federal Reserve Bank – Atlanta, October 2004
Inflation Dynamics’ Micro Foundations: How Important is Imperfect Competition
Sara Castellanos and Jose Murillo
Commented by
Jose Ricardo da Costa e Silva
Central Bank of Brazil
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Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting
Federal Reserve Bank – Atlanta, October 2004
Disclaim
“The views expressed here are mine and do not reflect those of the Central Bank of Brazil or of its members”
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Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting
Federal Reserve Bank – Atlanta, October 2004
Inflation Dynamic's Micro foundations
• Literature suggest imperfect competitions prices are those of interest for policy.
• How does Imperfect competitions prices affect price formation and dynamics.
• Uses method proposed by Panzar and Rosse (1987) to help build consumer price indexes of goods manufactured by perfectly and imperfectly competitive industries.
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Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting
Federal Reserve Bank – Atlanta, October 2004
Lead Lag
First Difference of Competitive Manufacture
Inflation in t and Imperfect Competitive in t-i1995.1-2004.6
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4
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Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting
Federal Reserve Bank – Atlanta, October 2004
Price Formation and Error Correction
c2 c3 c4 LambdaW LambdaE AdjR2CPI Coef 0.0318 0.0144 -0.0727 0.43 0.57 0.900
t-stud 4.63 6.98 -6.53Perfectly Coef -0.0010 0.0474 -0.0500 -0.02 0.95 0.821
t-stud -0.26 3.29 -2.95Imperfectly Coef 0.0135 0.0360 -0.0524 0.26 0.69 0.910
t-stud 3.37 4.94 -5.29
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Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting
Federal Reserve Bank – Atlanta, October 2004
Conclusions
• Inflation of perfectly competitive manufactures precedes that of imperfectly competitive manufactures. Hence, monitoring the first is useful to identify future prices pressures.
• Perfect competition presents high exchange rate coefficient (with strong long term exchange rate pass through) and low wages coefficients.
• Higher industry competition in the future may translate into a diminished role for monetary policy stimulus.
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Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting
Federal Reserve Bank – Atlanta, October 2004
Comments
• Estimates of imperfect competition brings some surprises: Pharmaceutical products, batteries, cars and trucks appear as perfectly competitive sectors while bakery and pastry as imperfectly.
• High long term pass-through of perfect competitive sector (0.95) may be peculiar to Mexican economy.
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Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting
Federal Reserve Bank – Atlanta, October 2004
CPI x Comp x Oligopolies - Brazil12 Month Variations
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
set/9
4
jan/
95
mai
/95
set/9
5
jan/
96
mai
/96
set/9
6
jan/
97
mai
/97
set/9
7
jan/
98
mai
/98
set/9
8
jan/
99
mai
/99
set/9
9
jan/
00
mai
/00
set/0
0
jan/
01
mai
/01
set/0
1
jan/
02
mai
/02
set/0
2
jan/
03
mai
/03
set/0
3
jan/
04
mai
/04
IPCA Competitive Non-competitive
Weight comp 16%Weight Olig 20%
IPCA AV=8.6, SD= 5.1Com AV=9.8, SD =10.6Olig AV= 10.2, SD = 9.6
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Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting
Federal Reserve Bank – Atlanta, October 2004
Lag Lead of Comp PricesBrazil
First Difference of Competitive Manufacture
Inflation in t and Imperfect Competitive in t-i1995.1-2004.6
0
0.2
0.4
0.6
0.8
t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4
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Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting
Federal Reserve Bank – Atlanta, October 2004
Price Formation and Error CorrectionBrazil
c2 c3 c4 LambdaW LambdaE AdjR2IPCA Coef 0.0133 0.0111 -0.0574 0.23 0.19 0.697
t-stud 3.64 8.07 -8.22IPCACom Coef 0.0196 0.0168 -0.0536 0.37 0.31 0.422
t-stud 1.41 4.80 -4.11IPCAOlig Coef 0.0326 0.0263 -0.0900 0.36 0.29 0.579
t-stud 3.01 6.70 -6.70
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Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting
Federal Reserve Bank – Atlanta, October 2004
Conclusions and Comments • Conclusions:
– It seems that in Brazil, perfectly competitive prices do not precedes imperfectly competitive prices.
– Perfect competitive prices present almost the same wages and exchange rate pass-through.
– It does not seem that there will be a diminished role for monetary policy stimulus in the case of Brazil.
• Comments:– In the case of Brazil a relevant price is the regulated prices (energy,
communications, transport and others). They present a stronger exchange rate pass-through and higher inertia component due to contracts. It represents around 30% of IPCA. They are not sensible to monetary policy (they depend on oil price, exchange rate, contracts and regional political decisions).