IDEAS home Printed from https://ideas.repec.org/p/bca/bocawp/03-17.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • Jeannine Bailliu & Daniel Garcés & Mark Kruger & Miguel Messmacher, 2003. "Explaining and Forecasting Inflation in Emerging Markets: The Case of Mexico," Staff Working Papers 03-17, Bank of Canada.
  • Handle: RePEc:bca:bocawp:03-17
    as

    Download full text from publisher

    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp03-17.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Duguay, Pierre, 1994. "Empirical evidence on the strength of the monetary transmission mechanism in Canada: An aggregate approach," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 39-61, February.
    2. Schwert, G William, 2002. "Tests for Unit Roots: A Monte Carlo Investigation," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 5-17, January.
    3. Hansen, Bruce E, 2002. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 45-59, January.
    4. Marco Terrones & Luis Catão, 2001. "Fiscal Deficits and Inflation; A New Look at the Emerging Market Evidence," IMF Working Papers 01/74, International Monetary Fund.
    5. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    6. Tim Callen & Dongkoo Chang, 1999. "Modeling and Forecasting Inflation in India," IMF Working Papers 99/119, International Monetary Fund.
    7. Tiff Macklem, 1997. "Capacity constraints, price adjustment, and monetary policy," Bank of Canada Review, Bank of Canada, vol. 1997(Spring), pages 39-56.
    8. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters,in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc.
    9. Armour, J. & Atta-Mensah, J. & Engert, W. & Hendry, S., 1996. "A Distant-Early-Warning Model of Inflation Based on M1 Disequilibria," Staff Working Papers 96-5, Bank of Canada.
    10. Goodfriend, Marvin, 1997. "A framework for the analysis of moderate inflations," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 45-65, June.
    11. Alain DeSerres, & Alain Guay & Pierre St-Amant, "undated". "Estimating and Projecting Potential Output Using Structural VAR Methodology: The Case of the Mexican Economy," Staff Working Papers 95-2, Bank of Canada.
    12. Stanley Fischer & Ratna Sahay & Carlos A. Végh, 2002. "Modern Hyper- and High Inflations," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 837-880, September.
    13. Maral Kichian, 2001. "On the Nature and the Stability of the Canadian Phillips Curve," Staff Working Papers 01-4, Bank of Canada.
    14. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
    15. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-1088, October.
    16. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, January.
    17. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270.
    18. Engert, Walter & Hendry, Scott, 1998. "Forecasting Inflation with the M1-VECM: Part Two," Staff Working Papers 98-6, Bank of Canada.
    19. Scott Hendry, 1995. "Long-Run Demand for M1," Macroeconomics 9511001, EconWPA.
    20. M S Mohanty & Marc Klau, 2001. "What determines inflation in emerging market economies?," BIS Papers chapters,in: Bank for International Settlements (ed.), Modelling aspects of the inflation process and the monetary transmission mechanism in emerging market countries, volume 8, pages 1-38 Bank for International Settlements.
    21. Fung, Ben Siu-cheong & Kasumovich, Marcel, 1998. "Monetary shocks in the G-6 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 575-592, October.
    22. Nicoletti-Altimari, Sergio, 2001. "Does money lead inflation in the euro area?," Working Paper Series 0063, European Central Bank.
    23. Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Oxford University Press, vol. 57(1), pages 99-125.
    24. David T. Coe & C. John McDermott, 1997. "Does the Gap Model Work in Asia?," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 59-80, March.
    25. Kenny, Geoff & McGettigan, Donal, 1999. "Modelling Traded, Non-traded and Aggregate Inflation in a Small Open Economy: The Case of Ireland," Manchester School, University of Manchester, vol. 67(1), pages 60-88, January.
    26. Francisco d Nadal De Simone, 2000. "Forecasting Inflation in Chile Using State-Space and Regime-Switching Models," IMF Working Papers 00/162, International Monetary Fund.
    27. Gunnar Jonsson, 1999. "Inflation, Money Demand, and Purchasing Power Parity in South Africa," IMF Working Papers 99/122, International Monetary Fund.
    28. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-858, September.
    29. Prakash Loungani & Phillip L Swagel, 2001. "Sources of Inflation in Developing Countries," IMF Working Papers 01/198, International Monetary Fund.
    30. Jean-François Fillion & André Léonard, 1997. "La courbe de Phillips au Canada : un examen de quelques hypothèses," Staff Working Papers 97-3, Bank of Canada.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Julia Bersch & Steven A Barnett & Yasuhisa Ojima, 2012. "Inflation Dynamics in Mongolia; Understanding the Roller Coaster," IMF Working Papers 12/192, International Monetary Fund.
    2. repec:eee:intfor:v:33:y:2017:i:4:p:1082-1104 is not listed on IDEAS
    3. Garcés Díaz Daniel, 2016. "Changes in Inflation Predictability in Major Latin American Countries," Working Papers 2016-20, Banco de México.
    4. S. Adnan & H.A.S. BUKHARI & Safdar Ullah KHAN, 2008. "Does Volatility In Government Borrowing Leads To Higher Inflation? Evidence From Pakistan," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(3(5)_Fall), pages 187-202.
    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.
    6. Madhavi Bokil & Axel Schimmelpfennig, 2006. "Three Attempts at Inflation Forecasting in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(3), pages 341-368.
    7. Héctor Mauricio Nuñez Amortegui, 2005. "Una evaluación de los pronósticos de inflación en Colombia bajo el esquema de inflación objetivo," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO, December.
    8. Ilker Domac, 2003. "Explaining and Forecasting Inflation in Turkey," Working Papers 0306, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    9. Mandalinci, Zeyyad, 2017. "Forecasting inflation in emerging markets: An evaluation of alternative models," International Journal of Forecasting, Elsevier, vol. 33(4), pages 1082-1104.
    10. 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.

    More about this item

    Keywords

    Inflation and prices; International topics;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:03-17. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://www.bank-banque-canada.ca/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.