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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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    1. Rudd, Jeremy & Whelan, Karl, 2005. "New tests of the new-Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1167-1181, September.
    2. Juan José Echavarría & Norberto Rodríguez N. & Luis Eduardo Rojas, 2013. "La meta del banco central y la persistencia de la inflación en Colombia," Investigación Conjunta-Joint Research, in: Laura Inés D'Amato & Enrique López Enciso & María Teresa Ramírez Giraldo (ed.), Dinámica inflacionaria, persistencia y formación de precios y salarios, edition 1, chapter 5, pages 117-138, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    3. Olivier Coibion & Yuriy Gorodnichenko, 2015. "Is the Phillips Curve Alive and Well after All? Inflation Expectations and the Missing Disinflation," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 197-232, January.
    4. Óscar Reinaldo Becerra & Luis Fernando Melo Velandia., 2009. "Transmisión de Tasas de Interés bajo el Esquema de Metas de Inflación: Evidencia para Colombia," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 46(133), pages 107-134.
    5. González-Gómez, Andrés & Guarín-López, Alexander & Rodríguez, Diego & Vargas-Herrera, Hernando, 2020. "4GM: A New Model for the Monetary Policy Analysis in Colombia," Working papers 31, Red Investigadores de Economía.
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    7. Klaus Adam & Mario Padula, 2011. "Inflation Dynamics And Subjective Expectations In The United States," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 13-25, January.
    8. Refet S. Gürkaynak & Brian Sack & Jonathan H. Wright, 2010. "The TIPS Yield Curve and Inflation Compensation," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 70-92, January.
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    More about this item

    Keywords

    Inflation expectations; inflation dynamics; New-Keynesian Phillips Curve; Generalized Method of Moments; expectativas de inflación; dinámica inflacionaria; curva de Phillips neokeynesiana; método generalizado de momentos;
    All these keywords.

    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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