Global and Idiosyncratic Factors in Inflation Dynamics in Latin America

This paper quantifies the role of global and idiosyncratic factors in inflation dynamics for a group of Latin American countries (Peru, Chile, Colombia, Brazil, Mexico) and Canada, which are characterized by conducting their monetary policy under an explicit inflation-targeting framework. To this end, a panel VAR model that accounts for heterogeneity among the countries in the sample is employed. The model is estimated for the period January 2005–November 2015, using global variables (the value of the dollar relative to a basket of currencies, a commodity price index, and the price of oil) as well as domestic variables (the monetary policy rate, the output gap, the depreciation of domestic currencies, imported inflation, and headline inflation). The results show that deviations of inflation from its target levels—particularly during the 2007–2009 period and from 2013 onward—are largely explained by factors common to the region, although there are idiosyncratic factors that have exacerbated these deviations in some countries, such as Brazil.