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The measure matters: differences in the passthrough of inflation expectations in Colombia

Author

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  • Andres Sanchez-Jabba
  • Erick Villabon-Hinestroza

Abstract

This study examines the effect of different measures of inflation expectations on inflation dynamics in Colombia from 2009 to 2024. We estimate New Keynesian Phillips Curves (NKPC) and Structural VAR (SVAR) models using data from economic surveys and sovereign bond yields. Our results show that survey-based expectations have a greater passthrough to inflation, with a one percentage-point increase leading to a 0.8 percentage-point rise in inflation, compared to a 0.67 percentage-point rise from market-based expectations. These differences are attributed to how economic agents form expectations, influenced by asymmetric losses, forecasting costs, and information rigidities. Our findings provide crucial insights for monetary authorities, who increasingly rely on various measures of inflation expectations for policy analysis. Understanding the distinct effects of these measures helps central banks implement policies that avoid unintended consequences, such as unnecessary contractions in economic activity.

Suggested Citation

  • Andres Sanchez-Jabba & Erick Villabon-Hinestroza, 2024. "The measure matters: differences in the passthrough of inflation expectations in Colombia," BIS Working Papers 1205, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1205
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    More about this item

    Keywords

    inflation expectations; inflation dynamics; new-Keynesian Phillips curve; generalised method of moments;
    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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