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Short Term Inflation Determinants in Barbados
Author:
Gregorio Impavido
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Series:
IMF Working Papers
Volume/Issue:
Volume 2018: Issue 134
Language:
English
Publication Date:
13 Jun 2018
DOI:
https://doi.org/10.5089/9781484361580.001
ISBN:
9781484361580
ISSN:
1018-5941
Pages:
26
Keywords:
WP; headline inflation; exchange rate; output gap; Barbados; inflation; monetary transmission; pegged exchange rate; capital controls; inflation expectation; reviews inflation dynamics; inflation difference equation; inflation underestimation; inflation expectations number; Oil prices; Import prices; Food prices; Terms of trade; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Inflation in Barbados is mainly imported. But how are external shocks transmitted to the domestic economy? Shouldn’t there be also a domestic component, albeit very small, given the presence of capital controls? We focus on short term dynamics and contribute to the existing literature in three ways: (i) we identify the process with which inflation expectations are likely to be formed in Barbados; (ii) we add forward looking inflation expectations as one of the main channels through which external monetary shocks are transmitted to the economy; and (iii) we measure the importance of domestic shocks. We find that due to the peg, forward-looking inflation expectations in the reserve currency country are an important component of the inflation expectation process in Barbados and that they are a key channel in the international monetary transmission mechanism. Domestic factors, mainly monetary shocks, also matter given the limited degree of monetary autonomy provided by capital controls.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2018: Issue 134