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Analysis of the Dynamics of Mexican Inflation Using Wavelets

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  • Carla Ysusi
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    Abstract

    This paper studies the dynamics of Mexican inflation by using a wavelet multiresolution analysis on 16 indexes of the Mexican Consumer Price Index. This enables us to estimate the long-term trend, seasonality, and local shocks of the inflation series, even when the series are non-stationary. The energy distribution between the high frequency, seasonal, and trend components, as well as its evolution through time, are compared. In particular, headline and core inflations show a more stable behavior in all the scales since 2001. Also, an increase in the proportion of variance explained by short-term variations is detected in the inflation series. In relative terms, the short run is becoming as important for headline inflation as the medium and long run, and more important for non-core inflation. These results are in line with previous studies documenting the reduction in the Mexican inflation persistence.

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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7BDF3D7067-C000-8077-2FF2-4F25287F5246%7D.pdf
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    Bibliographic Info

    Paper provided by Banco de México in its series Working Papers with number 2009-09.

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    Date of creation: Sep 2009
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    Handle: RePEc:bdm:wpaper:2009-09

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    Related research

    Keywords: Inflation dynamics; wavelets; multiresolution analysis; energy decomposition.;

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    1. Paul Castillo & Alberto Humala & Vicente Tuesta, 2007. "Monetary Policy, Regime Shifts, and Inflation Uncertainty in Peru (1949-2006)," Working Papers 2007-005, Banco Central de Reserva del Perú.
    2. Patrick M. Crowley, 2005. "An intuitive guide to wavelets for economists," GE, Growth, Math methods 0508009, EconWPA.
    3. Llosa, Luis-Gonzalo & Tuesta, Vicente, 2009. "Learning about monetary policy rules when the cost-channel matters," Journal of Economic Dynamics and Control, Elsevier, vol. 33(11), pages 1880-1896, November.
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    8. Manuel Ramos Francia & Alberto Torres García, 2005. "Reducing Inflation Through Inflation Targeting: The Mexican Experience," Working Papers 2005-01, Banco de México.
    9. Jensen, Mark J., 2000. "An alternative maximum likelihood estimator of long-memory processes using compactly supported wavelets," Journal of Economic Dynamics and Control, Elsevier, vol. 24(3), pages 361-387, March.
    10. Batini, Nicoletta, 2002. "Euro area inflation persistence," Working Paper Series 0201, European Central Bank.
    11. Li, Yun Daisy & Iscan, Talan B. & Xu, Kuan, 2010. "The impact of monetary policy shocks on stock prices: Evidence from Canada and the United States," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 876-896, September.
    12. Jensen, Mark J, 1999. "Using wavelets to obtain a consistent ordinary least squares estimator of the long-memory parameter," MPRA Paper 39152, University Library of Munich, Germany.
    13. Carlos Capistrán & Manuel Ramos-Francia, 2009. "Inflation Dynamics In Latin America," Contemporary Economic Policy, Western Economic Association International, vol. 27(3), pages 349-362, 07.
    14. Davidson, R. & Labys, W.C. & Lesourd, J.B., 1996. "Wavelet Analysis of Commodity Price Behavior," G.R.E.Q.A.M. 96b11, Universite Aix-Marseille III.
    15. Felices Guillermo & Tuesta Vicente, 2007. "Monetary Policy in Dual Currency Environment," Working Papers 2007-006, Banco Central de Reserva del Perú.
    16. Jim Granato & Melody Lo & M. C. Sunny Wong, 2007. "A note on Romer's openness-inflation relation: the responsiveness of AS and AD to economic openness and monetary policy," Applied Economics, Taylor & Francis Journals, vol. 39(2), pages 191-197.
    17. Ramsey James B. & Lampart Camille, 1998. "The Decomposition of Economic Relationships by Time Scale Using Wavelets: Expenditure and Income," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 3(1), pages 1-22, April.
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