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Inflation Expectations Measurement and its Effect on Inflation Dynamics in Colombia

Author

Listed:
  • Andres Sanchez-Jabba
  • Erick Villabon-Hinestroz
  • Bernardo Romero-Torres

Abstract

The main objective of this study is to determine whether the effect of inflation expectations on inflation dynamics in Colombia depends on the measurement of this variable. For this purpose, we estimate New-Keynesian Phillips Curves measuring expectations with data from financial markets, economic surveys, and macroeconomic models. Our findings show that a one percentage point increase in financial market expectations (BEI) leads to a median increment in inflation of 0.96 percentage points, while economic survey (QSEE) and macroeconomic model (4GM) expectations yield median effects of 0.78 and 0.50 percentage points, respectively. Possible explanations for the differences in the effect of expectations on inflation relate to asymmetric losses in forecast errors, variations in forecasting costs, rigidities in information transmission, and economic modelling limitations. **** RESUMEN: El objetivo principal de este estudio es determinar si el efecto de las expectativas de inflación en la dinámica de la inflación en Colombia depende de la medición de esta variable. Para este propósito, estimamos Curvas de Phillips Neokeynesianas midiendo las expectativas con datos de mercados financieros, encuestas económicas y modelos macroeconómicos. Nuestros resultados muestran que un aumento de un punto porcentual en las expectativas del mercado financiero (BEI) conduce a un incremento medio en la inflación de 0.96 puntos porcentuales, mientras que las expectativas de encuestas económicas (QSEE) y de modelos macroeconómicos (4GM) producen efectos medios de 0.78 y 0.50 puntos porcentuales, respectivamente. Las posibles explicaciones de estas diferencias en el efecto de las expectativas en la inflación están relacionadas con pérdidas asimétricas en los errores de pronóstico, variaciones en los costos de pronóstico, rigideces en la transmisión de información y limitaciones en la modelización económica.

Suggested Citation

  • Andres Sanchez-Jabba & Erick Villabon-Hinestroz & Bernardo Romero-Torres, 2023. "Inflation Expectations Measurement and its Effect on Inflation Dynamics in Colombia," Borradores de Economia 1257, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:1257
    DOI: 10.32468/be.1257
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    References listed on IDEAS

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    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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