Anchoring of Inflation Expectations in Latin America

We use inflation survey data from Consensus Economics to assess the degree of inflation expectations anchoring in Latin America. Following the methodology proposed by Mehrotra and Yetman (2017), we model inflation forecasts using a decay function, where forecasts monotonically diverge from an estimated anchor towards recent actual inflation as the forecast horizon shortens. Our results suggest that most countries do have an inflation anchor, with the estimated weight of the anchor increasing through time, indicating more strongly anchored expectations. This is consistent with the improving credibility of central banks’ monetary policy management over our sample period (1993-2016). For countries with formal inflation targets, our results indicate that inflation targeting regimes are generally credible, with estimated anchors lying within the inflation target range for all countries in the most recent sample that we consider.