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Institutions, Economic Structure and Economic Policy: What Lies Beneath Inflation in Latin America?

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  • Adriana Arreaza-Coll
  • Luis Enrique Pedauga

Abstract

In this paper we examine the importance of institutional arrangements and factors related to the economic structure to explain inflation outcomes in Latin America. We perform a dynamic panel data analysis with an ample set of variables that allowed us to consider the temporal dimension of the data, and to control for endogeneity. Results lead us to believe that institutional arrangements – other than central bank independence – have played an important role in terms of inflation outcomes in Latin America. Variables that may affect inflation via time consistency problems seem somewhat more relevant than those suggested by optimal tax considerations. In particular, the negative correlation between political constraints to changes in public policies and inflation in Latin America is quite suggestive. We find that less flexible exchange rate regimes, advances in structural policies, and better government institutions have contributed to the reduction in inflation rates in the region. Faster growing countries exhibited lower inflation rates. Openness to trade seems to be positively correlated with inflation, suggesting that more open economies are more exposed to external shocks, allowing countries to benefit in terms of importing lower international inflation rates in recent years. Other variables did not prove to be significant.
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  • Adriana Arreaza-Coll & Luis Enrique Pedauga, 2007. "Institutions, Economic Structure and Economic Policy: What Lies Beneath Inflation in Latin America?," EcoMod2007 23900004, EcoMod.
    • Handle: RePEc:ekd:000239:23900004
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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