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Explaining and Forecasting Inflation in Emerging Markets: The Case of Mexico

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Author Info

  • Jeannine Bailliu
  • Daniel Garcés
  • Mark Kruger
  • Miguel Messmacher

Abstract

The authors apply existing inflation models that have worked well in industrialized countries to Mexico, an emerging market that has recently moved to adopt an inflation-targeting framework for monetary policy. They compare the performance of these models with a mark-up model that has been used extensively to analyze inflation in Mexico. The authors focus on three models that have some theoretical foundations and that can therefore help explain the causes of inflation as well as be used for forecasting purposes: a mark-up model, a money-gap model, and a Phillips curve. The authors' empirical results suggest that the evolution of the exchange rate remains a very important factor for forecasting inflation in Mexico. Indeed, in the best-performing model, the mark-up model, the exchange rate plays the most significant role. The Phillips curve explains and forecasts inflation well when using actual values for the explanatory variables, but does not perform well when using forecasted values for the explanatory variables. The money-gap model does not appear to be useful in its current form, because it is unable to beat even a simple AR1.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 03-17.

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Length: 39 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:bca:bocawp:03-17

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Keywords: Inflation and prices; International topics;

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References

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Citations

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Cited by:
  1. Ramos-Francia, Manuel & Torres, Alberto, 2008. "Inflation dynamics in Mexico: A characterization using the New Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 19(3), pages 274-289, December.
  2. Ilker Domac, 2003. "Explaining and Forecasting Inflation in Turkey," Working Papers 0306, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  3. Khan, Abdul Aleem & Ahmed, Qazi Masood & Hyder, Kalim, 2007. "Determinants oF Recent Inflation in Pakistan," MPRA Paper 16254, University Library of Munich, Germany, revised 2007.
  4. International Monetary Fund, 2005. "Three Attempts at Inflation Forecasting in Pakistan," IMF Working Papers 05/105, International Monetary Fund.
  5. Haider, Adnan & Khan, Safdar Ullah, 2007. "Does Volatility in Government Borrowing Leads to Higher Inflation? Evidence from Pakistan," MPRA Paper 17008, University Library of Munich, Germany.
  6. Julia Bersch & Steven Barnett & Yasuhisa Ojima, 2012. "Inflation Dynamics in Mongolia: Understanding the Roller Coaster," IMF Working Papers 12/192, International Monetary Fund.

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