An Empirical Investigation of the Ratchet Effect in the OECD, 1985--2009

This paper employs a reduced form structuralist model of inflation in the OECD over the period 1985--2009 to find out whether domestic prices respond symmetrically to rising and falling import prices. We find that the response is asymmetrical: domestic prices rise when import prices rise but they do not fall when import prices fall. Our finding thus confirms the presence of a ratchet effect in the sample countries during the sample period, and implies that factors -- such as exchange rate fluctuations and movements in tariff rates -- that influence import prices tend to be inflationary.