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The Evolution of Inflation Expectations in Mexico

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  • Santiago García-Verdú

Abstract

This paper presents an analysis of the expected inflation distribution based on the surveys made to economic analysts in the private sector, by Banco de México. Conceptually, the analysis can be divided into three aspects: level, dispersion, and skewness, of expected inflation. It is anticipated that the behavior of these aspects will be consistent with the process of inflation convergence to its target, in the sense that the expected inflation level and dispersion, and the probability of observing a sizable realization of inflation have been diminishing, as the cited process has taken place. Additionally, first, a model is presented in which agents face a cost when they update their inflation expectation. This model explains some of the facts seen in inflation expectation dispersion. In the model, the decrease in the dispersion is consistent with an increase in the frequency with which the agents update their inflation expectation, as observed in the data. Second, under an event-study framework the respond of upside risks of inflation expectations to the approval of the Income Law is analyzed. The results suggest that once the cited law is approved, on average there is a decrease in such risks.

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File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7BBE49572F-F67C-07DC-28E0-874469F3B7F5%7D.pdf
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Bibliographic Info

Paper provided by Banco de México in its series Working Papers with number 2012-06.

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Date of creation: Aug 2012
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Handle: RePEc:bdm:wpaper:2012-06

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Web page: http://www.banxico.org.mx
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Keywords: Inflation; Expectations; Expected Inflation.;

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  1. Manuel Ramos Francia & Daniel Chiquiar & Antonio E. Noriega, 2007. "Time Series Approach to Test a Change in Inflation Persistence: The Mexican Experience," Working Papers 2007-01, Banco de México.
  2. Fabia A de Carvalho & Mauricio S. Bugarin, 2006. "Inflation Expectations in Latin America," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  3. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  4. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  5. 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.
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