Price Setting in a Variable Macroeconomic Environment: Evidence from Brazilian CPI∗

We study price setting in a variable macroeconomic environment using a unique data set from the Brazilian CPI index of Fundação Getulio Vargas. Our primary data consist of a panel of individual prices for goods and services covering 100% of the CPI for the 1996-2008 period. During this period a number of important events produced substantial macroeconomic variability in Brazil: two emerging market crises, a change of exchange rate and monetary regimes, blackouts and energy rationing, an election crisis, and a regular disinflation. As a consequence, inflation, macroeconomic uncertainty, exchange rates, and output exhibit important variation in our sample. We construct time series of price-setting statistics and relate them to macroeconomic variables using regression analyses. As an illustration of our results, we find that price increases are less frequent after a period of exchange rate appreciation, and more frequent: i) when inflation is higher; after a period of exchange rate depreciation (with an asymmetry relative to appreciations); in periods of high economic activity; and when macroeconomic uncertainty is higher. ∗*We thank IBRE-FGV (Brazilian Economy Institute of Getulio Vargas Foundation) for providing the data set, and participants at LACEA 2008, 2009 Workshop in International Economics and Finance in Montevideo, 2009 NBER SI 2009 Monetary Economics, seminars at EESP-FGV, Di Tella, and IPEA for comments on an even more preliminary version of this project. The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.