Price Setting during Low and High Inflation: Evidence from Mexico

By Etienne Gagnon. 2007

337 citations recorded by the source corpus.

This paper provides new insight into the relationship between inflation and the setting of individual prices by examining a large data set of Mexican consumer prices covering episodes of both low and high inflation. When the annual rate of inflation is low (below 10%–15%), the frequency of price changes comoves weakly with inflation because movements in the frequency of price decreases and increases partly offset each other. In contrast, the average magnitude of price changes correlates strongly with inflation because it is sensitive to movements in the relative shares of price increases and decreases. When inflation rises beyond 10%–15%, few price decreases are observed and both the frequency and average magnitude are important determinants of inflation. I show that a menu-cost model with idiosyncratic technology shocks predicts the average frequency and magnitude of price changes well over a range of inflation similar to that experienced by Mexico.

Subfields: Economics and Econometrics

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Citations in the corpus

Price Rigidity: Microeconomic Evidence and Macroeconomic Implications (2013, positive): “Gagnon (2009) studies this question using data on price adjustment in Mexico over the period 1994 to 2002. Mexico experienced a serious currency crisis in December of 1994. Year-on-year inflation in Mexico rose from below 10% in the fall of 1994 to about 40% in the spring of 1995. Inflation then fel”
Economic geography and wages in Brazil: Evidence from micro-data (2010, neutral): “This substantial difference in the educational level of the work force across regions may be explained by sorting (Combes and Duranton, 2006) or endogenous differences in returns to schooling (Redding and Schott 2003).”
Price Setting With Menu Cost for Multiproduct Firms (2014, background): “…provides a good approximation to the true rules for inflation rates that are small relative to the variance of idiosyncratic shocks, an assumption that seems appropriate for developed economies (see Gagnon (2009), Alvarez, Gonzalez-Rozada, Neumeyer, and Beraja (2011) for related evidence).”
The spatial effects of trade openness: a survey (2011, background): “15 Faber (2007) confirms that employment in export-oriented industries grew more strongly in Mexican border regions, but suggests that import-competing industries grew more strongly in interior regions.”
From Hyperinflation to Stable Prices: Argentina’s Evidence on Menu Cost Models* (2018, neutral): “…et al. (2006), for the United States from Bils and Klenow (2004), Klenow and Kryvtsov (2008), and Nakamura and Steinsson (2008), for Mexico from Gagnon (2009), for Israel from Baharad and Eden (2004) and Lach and Tsiddon (1992), for Poland from Konieczny and Skrzypacz (2005), for Brazil…”
The Demand for, and Consequences of, Formalization Among Informal Firms in Sri Lanka (2012, neutral): “3 liability companies (Klapper et al, 2006).2 But the endogeneity of regulatory choices complicates any claim of causation based on the cross country patterns.”
Price Setting with Menu Cost for Multi-Product Firms (2012, positive): “The theoretical result about the insensitivity of Na -and the associated linearity of E[∆p]is supported by the evidence in Gagnon (2009) who, among others, finds that when inflation is low (say below 10-15%), the frequency of price changes is almost unrelated to inflation, and that the average magni”
The Macroeconomics of Trend Inflation (2014, neutral): “88 See also Gagnon (2009). gate the zero bound constraint?”
Five Facts about Prices: A Reevaluation of Menu Cost Models (2008, neutral): “This corresponds (33)Gagnon (2005) has emphasized the importance of distinguishing between price increases and price decreases in this context.”