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Explaining and Forecasting Inflation in Emerging Markets: The Case of Mexico

Author

Listed:
  • Jeannine Bailliu
  • Daniel Garcés
  • Mark Kruger
  • Miguel Messmacher
Abstract
The authors apply existing inflation models that have worked well in industrialized countries to Mexico, an emerging market that has recently moved to adopt an inflation-targeting framework for monetary policy. They compare the performance of these models with a mark-up model that has been used extensively to analyze inflation in Mexico. The authors focus on three models that have some theoretical foundations and that can therefore help explain the causes of inflation as well as be used for forecasting purposes: a mark-up model, a money-gap model, and a Phillips curve. The authors' empirical results suggest that the evolution of the exchange rate remains a very important factor for forecasting inflation in Mexico. Indeed, in the best-performing model, the mark-up model, the exchange rate plays the most significant role. The Phillips curve explains and forecasts inflation well when using actual values for the explanatory variables, but does not perform well when using forecasted values for the explanatory variables. The money-gap model does not appear to be useful in its current form, because it is unable to beat even a simple AR1.

Suggested Citation

  • Jeannine Bailliu & Daniel Garcés & Mark Kruger & Miguel Messmacher, 2003. "Explaining and Forecasting Inflation in Emerging Markets: The Case of Mexico," Staff Working Papers 03-17, Bank of Canada.
    • Handle: RePEc:bca:bocawp:03-17
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    References listed on IDEAS

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    Cited by:

    1. Ramos-Francia, Manuel & Torres, Alberto, 2008. "Inflation dynamics in Mexico: A characterization using the New Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 19(3), pages 274-289, December.
    2. Mandalinci, Zeyyad, 2017. "Forecasting inflation in emerging markets: An evaluation of alternative models," International Journal of Forecasting, Elsevier, vol. 33(4), pages 1082-1104.
    3. Ilker Domac, 2003. "Explaining and Forecasting Inflation in Turkey," Working Papers 0306, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    4. Garcés Díaz Daniel, 2016. "Changes in Inflation Predictability in Major Latin American Countries," Working Papers 2016-20, Banco de México.
    5. Khan, Abdul Aleem & Ahmed, Qazi Masood & Hyder, Kalim, 2007. "Determinants oF Recent Inflation in Pakistan," MPRA Paper 16254, University Library of Munich, Germany, revised 2007.
    6. International Monetary Fund, 2005. "Three Attempts at Inflation Forecasting in Pakistan," IMF Working Papers 2005/105, International Monetary Fund.
    7. S. Adnan & H.A.S. BUKHARI & Safdar Ullah KHAN, 2008. "Does Volatility In Government Borrowing Leads To Higher Inflation? Evidence From Pakistan," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(3(5)_Fall), pages 187-202.
    8. Héctor Mauricio Nunez Amortegui, 2005. "Una evaluación de los pronósticos de inflación en Colombia bajo el esquema de inflación objetivo," Revista de Economía del Rosario, Universidad del Rosario, December.
    9. Julia Bersch & Mr. Steven A Barnett & Mr. Yasuhisa Ojima, 2012. "Inflation Dynamics in Mongolia: Understanding the Roller Coaster," IMF Working Papers 2012/192, International Monetary Fund.
    10. Ramos-Francia, Manuel & Torres, Alberto, 2008. "Inflation dynamics in Mexico: A characterization using the New Phillips curve," The North American Journal of Economics and Finance, Elsevier, vol. 19(3), pages 274-289, December.
    11. Emara, Noha & Zecheru, Daniela, 2022. "Is the Impact of Digitization on Domestic Inflation Non-Linear? The Case of Emerging Markets," MPRA Paper 106015, University Library of Munich, Germany.

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    More about this item

    Keywords

    Inflation and prices; International topics;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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