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Short Term Inflation Determinants in Barbados

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  • Gregorio Impavido

Abstract

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.

Suggested Citation

  • Gregorio Impavido, 2018. "Short Term Inflation Determinants in Barbados," IMF Working Papers 2018/134, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2018/134
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    References listed on IDEAS

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