Inflation Dynamics in Latin America

Abstract

We analyze inflation's persistence in the 1980-2006 period for the ten largest Latin American economies using univariate time-series techniques. Although the estimated degree of inflation persistence appears to be different across countries, for the region as a whole the persistence seems to be very high. However, the estimated degree of persistence falls in all countries once we permit structural breaks in the mean of inflation. The timing of these breaks coincides with shifts in the monetary policy regimes and is similar across countries. Regardless of the changes in the mean, the degree of persistence appears to be decreasing in the region, even though for some countries persistence does not seem to be changing.

Inflation dynamics in Mexico: A characterization using the New Phillips curve

“…The results found in this paper are in line with several stylized facts that have been documented recently for in ‡ation in Mexico. For example, the reduction in the relative importance of the backward looking component of in ‡ation is in line with the reduction in in ‡ation persistence that has been documented by Capistrán and Ramos-Francia (2006a) and Noriega (2006). Similarly, the smaller fraction of …rms that use a backward looking rule to set their price is consistent with the …nding of Capistrán and Ramos-Francia (2006b) that, as in ‡ation decreases, in ‡ation credibility in the in ‡ation target is improved.…”

“…For speci…cation I parameter increases from 0.83 to 0.89, implying that the average number of periods for which …rms keep their price …xed increased from 2 to 3 quarters. For speci…cation II this parameter increases from 0.64 to 0.78, implying also that the average number of periods prices remain unchanged increased from 0.9 to 1 6 The evidence presented by Capistrán and Ramos-Francia (2006a) shows that in ‡ation experienced an additional reduction (structural break) in most countries in the Latin American region in the late nineties. In the case of Mexico, the methodology of Bai and Perron (2003) 1.5 quarters.…”

“…This result is perhaps explained by the fact that over the sample period the economy was exposed to several strong adverse supply shocks which, in general, led to episodes of rising in ‡ation and to a reduction in the output gap (e.g., 1995 and end 1998-early 1999). 1 Capistrán and Ramos-Francia (2006a) analyze the dynamics of in ‡ation in Latin America and show that in the late eighties and early nineties, in ‡ation experienced an important reduction (structural break) that preceded a long episode of low in ‡ation and low in ‡ation volatility in most economies of the region, part of the so-called "great moderation." In the case of Mexico, their results suggest that in ‡ation experienced a structural break in the form of a reduction in its mean in March of 1988.…”

“…In particular, during 1995 the economy underwent a …nancial crisis, refered to as the "Tequila" crisis. To address this situation, a comprehensive stabilization package was put in place Torres, 2005 andRamos-Francia, 2006a). As it happened, although GDP contracted sharply during that year, the economic program implemented was able to stabilize the economy in a relatively short period of time.…”

Empirical Regularities of Inflation Volatility: Evidence from Advanced and Developing Countries

“…In an economy, the properties of inflation dynamics are characterized predominantly by three features, namely steady-state level of inflation, persistence of inflation and inflation variability (Capistrán & Ramos-Francia, 2006). There is an abundant literature that has addressed the first two attributes of inflation dynamics.…”