Inflation at risk in advanced and emerging market economies

Ryan Banerjee, Juan Contreras, Aaron Mehrotra and Fabrizio Zampolli

Journal of International Money and Finance, 2024, vol. 142, issue C

Abstract: Using quantile regression techniques, we study the drivers of inflation risks in a large panel of advanced and emerging market economies (EMEs). We document several facts regarding the inflation forecast distribution and highlight some key differences between these two groups of countries. First, the exchange rate has a quantitatively important and non-linear impact on the inflation outlook in EMEs: a depreciation is associated with larger increases in the upper quantiles than in the lower quantiles, increasing the right skewness of the distribution. By contrast, there is no evidence of such non-linearities for advanced economies. Second, tighter financial conditions in EMEs carry both downside and upside risks to inflation, while having a muted impact on the modal or mean outcome. This is in contrast to advanced economies, where only downside risks prove sensitive. Third, the zero lower bound on policy rates translates into substantial downside risks to inflation. Finally, the adoption of inflation targeting is associated not only with lower mean inflation but also with a less right-skewed distribution. Our findings underscore the importance of including non-linearities in structural models of inflation dynamics.

Keywords: Quantile regressions; Forecast density; Inflation risk; Monetary policy framework; Exchange rates; Zero lower bound; Inflation targeting (search for similar items in EconPapers)
JEL-codes: E31 E37 E52 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:142:y:2024:i:c:s0261560624000123

DOI: 10.1016/j.jimonfin.2024.103025

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