1. Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting Federal Reserve Bank – Atlanta, October 2004 Inflation Dynamics’ Micro Foundations: How Important is Imperfect Competition Sara Castellanos and Jose Murillo Commented by Jose Ricardo da Costa e Silva Central Bank of Brazil

2. Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting Federal Reserve Bank – Atlanta, October 2004 Disclaim “The views expressed here are mine and do not reflect those of the Central Bank of Brazil or of its members”

3. Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting Federal Reserve Bank – Atlanta, October 2004 Inflation Dynamic's Micro foundations Literature suggest imperfect competitions prices are those of interest for policy. How does Imperfect competitions prices affect price formation and dynamics. Uses method proposed by Panzar and Rosse (1987) to help build consumer price indexes of goods manufactured by perfectly and imperfectly competitive industries.

4. Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting Federal Reserve Bank – Atlanta, October 2004 Lead Lag

5. Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting Federal Reserve Bank – Atlanta, October 2004 Price Formation and Error Correction

6. Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting Federal Reserve Bank – Atlanta, October 2004 Conclusions Inflation of perfectly competitive manufactures precedes that of imperfectly competitive manufactures. Hence, monitoring the first is useful to identify future prices pressures. Perfect competition presents high exchange rate coefficient (with strong long term exchange rate pass through) and low wages coefficients. Higher industry competition in the future may translate into a diminished role for monetary policy stimulus.

7. Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting Federal Reserve Bank – Atlanta, October 2004 Comments Estimates of imperfect competition brings some surprises: Pharmaceutical products, batteries, cars and trucks appear as perfectly competitive sectors while bakery and pastry as imperfectly. High long term pass-through of perfect competitive sector (0.95) may be peculiar to Mexican economy.

8. Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting Federal Reserve Bank – Atlanta, October 2004 CPI x Comp x Oligopolies - Brazil

9. Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting Federal Reserve Bank – Atlanta, October 2004 Lag Lead of Comp Prices Brazil

10. Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting Federal Reserve Bank – Atlanta, October 2004 Price Formation and Error Correction Brazil

11. Strategies for Implementing Monetary Policy in the Americas: The Role of Inflation Targeting Federal Reserve Bank – Atlanta, October 2004 Conclusions and Comments Conclusions: –It seems that in Brazil, perfectly competitive prices do not precedes imperfectly competitive prices. –Perfect competitive prices present almost the same wages and exchange rate pass-through. –It does not seem that there will be a diminished role for monetary policy stimulus in the case of Brazil. Comments: –In the case of Brazil a relevant price is the regulated prices (energy, communications, transport and others). They present a stronger exchange rate pass-through and higher inertia component due to contracts. It represents around 30% of IPCA. They are not sensible to monetary policy (they depend on oil price, exchange rate, contracts and regional political decisions).