Propagation of Inflationary Shocks in Chile and an International Comparison of Progagation of Shocks to food and Energy Prices

When a specific price is affected by a shock, this may spread to other prices and thus affect the overall inflation rate by more than the initial effect. This phenomenon is known as propagation of inflationary shocks and is the subject investigated in the present paper. It is argued that structural VAR models, with an imposed Cholesky decomposition, are suitable for the propagation analysis when the data vector includes the component affected by the initial shock and the rest of the CPI basket. The empirical analysis with annual Chilean inflation rates suggests that the propagation effects have generally diminished after the implementation of the inflation-targeting regime in September 1999. Propagation of shocks to the division including food prices, however, has increased, albeit with a delay of four months. An analysis of propagation of energy and food price shocks in seven industrialized and four Latin-American countries suggests that the effects in Chile are amongst the largest and, in the case of energy price shocks, with the longest duration.