Inertial inflation, indexation and price stickiness: Evidence from Brazil

This paper evaluates the inertial inflation hypothesis for Brazil. The hypo thesis posits that indexation created a feedback mechanism such that one-ti me supply shocks were fully transmitted into permanent changes in inflation . A theoretical model is used to show that this outcome is based on the ass umption of perfect price flexibility. However, with price stickiness indexa tion does not produce inertial inflation. The degree of inertia is then com pared for two periods: one without indexation (1945-1963), and one with ind exation (1969-1985). Finally, vector-autoregressive representations;are est imated for the latter period, allowing for price stickiness. The empirical results do not support the hypothesis. (C) 1999 Elsevier Science B.V. All r ights reserved.