A Non-linear "Inflation-Relative Prices Variability" Relationship: Evidence from Latin America

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Mª Ángeles Caraballo Pou ; Carlos Dabús ; Diego Caramuta (2006)
  • Subject: Non-linearities, inflation regimes, relative prices variability, unexpected inflation.
    • jel: jel:E3 | jel:E0
    arxiv: General Relativity and Quantum Cosmology | Astrophysics::Cosmology and Extragalactic Astrophysics

This paper presents evidence on a non-linear "inflation-relative prices variability" relationship in three Latin American countries with very high inflation experiences: Argentina, Brazil and Peru. More precisely, and in contrast to results found in previous literature for similar countries, we find a non-concave relation at higher inflation regimes, i.e. when inflation rate surpasses certain threshold. This non-concavity is mainly explained by the unexpected component of inflation, which suggests that the uncertainty associated to very high inflation periods can be quite relevant to understand the non neutrality of inflation in extreme price instability.
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