Price setting and inflation dynamics in small open economies

This dissertation analyzes the nature of price setting behavior and inflation dynamics in Mexico and Turkey. The first chapter provides an overview, of the dissertation. The second chapter presents econometric estimates of the relative importance of forward versus backward looking behavior in the pricing of tradable goods. The main finding of this chapter is that the pricing of tradables is predominantly forward looking, implying only a limited degree of inflation stickiness in that sector. The third chapter analyzes the case of nontradable goods, and presents econometric evidence that the inflation in the nontradables sector exhibits a significant degree of stickiness. The implications of this estimated degree of inflation stickiness are explored in a model of imperfectly credible exchange rate based stabilization. The fourth chapter presents an overview of the macroeconomic developments that have had a bearing on the inflationary process in Turkey during 1987–2001.