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

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>