Inflation inertia: a time-series comparative analysis

Abstract

Despite the deindexation occurred after the Real Plan in Brazil, several mechanisms of in-flation indexation persist, e.g., rental contracts readjustment, electricity and telephony tariffs,minimum wage readjustments and the governmental long-term interest rate. This study ana-lyzes the recent inertial component weight for a set of selected countries, i.e., Brazil, Chile,and the United States (US). For this, we used a vector autoregressive (VAR) model, setting theautoregressive component as a proxy for inertial weight. The variance decomposition and theimpulse-response of the inflation index evidence that Brazil’s inflation present a higher inertiarelative to Chile and US. This finding suggests a higher degree of vulnerability of Brazilianeconomy in the face of external shocks, which, due to high inertial demeanor of the economy,could lead to higher rates of sacrifice in future crises that Brazil confronts.