Relative price variability in Brazil: an analysis of headline and core inflation rates

Cleomar Gomes Da Silva

doi:10.1590/0103-6351/1459

Abstract

<p>The aim of this article is to study the causal relationship between inflation and relative price variability in Brazil. The period under analysis spans from January 1995 to June 2011. It focuses on both headline and core inflation rates, and also takes the inflation targeting regimeinto account. The time series analysis shows that: <italic>i</italic>) the correlation between inflation and relative price variability is positive and significant (the same applies to core inflation); <italic>ii</italic>) price dispersiondecreases after the implementation of inflation targeting; <italic>iii</italic>) there is bi-causality between Headline-IPCA and Headline-RPV, but causality from Core-IPCA to Core-RPV; <italic>iv</italic>) the impulse response functions show that shocks to Core-IPCA don't affect Core-RPV as much as shocks to Headline-IPCA affect Headline-RPV; <italic>v</italic>) the variance decomposition related to Core-IPCA and Core-RPV seems to be reduced when compared to headline inflation.</p>

Highlights

The aim of this article is to study the causal relationship between inflation and relative price variability in Brazil
By making use of OLS estimations, as well as Generalized Impulse Response Functions, Generalized Variance Decomposition and Granger Causality tests, the main findings are: i) the correlation between inflation and relative price variability is positive and significant; ii) price dispersion decreases after the implementation of inflation targeting; iii) there is bi-causality between Headline-IPCA and Headline-RPV, but causality from Core-IPCA to Core-RPV; iv) the impulse response functions show that shocks to Core-IPCA do not affect Core-RPV as much as shocks to Headline-IPCA affect Headline-RPV; v) the variance decomposition related to Core-IPCA and Core-RPV seems to be reduced when compared to headline inflation
Drifill, Mizon & Ulph (1990) and Bomberger & Makinen (1993), among others, emphasized that those results were due to the inclusion of variables related to large supply shocks.3However, Jaramillo (1999) showed that the results found by Parks (1978) could be obtained when asymmetric responses to episodes of inflation and disinflation were included in the regressions

Summary

Cleomar Gomes da Silva*

Key Words Relative Price Variability, Inflation, Monetary Policy JEL Classification C33, E31, E52 Palavras-Chave Dispersão dos Preços Relativos, Inflação, Política Monetária Classificação JEL C33, E31, E52. O objetivo deste artigo é estudar a relação causal entre inflação e variabilidade de preços relativos no Brasil, para o período entre janeiro de 1995 e junho de 2011. O foco é o IPCA e seu núcleo, levando-se também em conta o período das metas de inflação. A análise de séries temporais mostra que: 1) a correlação entre inflação e dispersão de preços relativos é positiva e significante (o mesmo se aplica ao núcleo da inflação); 2) para o período referente às metas para a inflação, há queda da dispersão de preços; 3) há bi-causalidade entre inflação total e dispersão total de preços, ao passo que a causalidade é do núcleo de inflação para sua respectiva variabilidade; 4) as funções de respostas a impulsos mostram que choques no núcleo do IPCA não afetam a dispersão dos preços do núcleo tanto quanto os choques ao IPCA total afetam a dispersão total de preços; 5) a decomposição de variância relacionada ao núcleo do IPCA e seu respectivo RPV parece estar reduzida em relação aos dados do IPCA cheio

Dummy IT

Null Hypothesis

Without IT Dummy

Findings

Generalized Forecast Error Variance Decomposition for Variable RPV