Global and Idiosyncratic Factors in Inflation Dynamics in Latin America

In this work, the role of global and idiosyncratic factors in the dynamics of inflation is quantified for a group of Latin American countries (Peru, Chile, Colombia, Brazil, Mexico) and Canada, which share the fact that their policy monetary policy is pursued under an explicit inflation targeting scheme. In order to do that, a Panel-VAR model that considers heterogeneity among the countries in the sample is used. This model is estimated for the period 2005M01-2015M11, using global variables (the value of the dollar against a basket of currencies, an index of commodity prices and the oil price) as well as domestic variables (the rate of monetary policy, the output gap, the depreciation of domestic currencies, imported and overall inflation). The outcomes show that deviations of inflation from its target levels, particularly during the 2007-2009 period and since 2013 onwards, are mainly explained by common factors to the region, although idiosyncratic factors have accentuated these deviations in some countries as is the case of Brazil. (Audio: Department of Economic Publications)