Inflation Expectations: Dynamics and Effects for South America

Osmar Bolivar Rosales (), Christian Huanto Quispe () and Roberto Terán ()
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Roberto Terán: Ministerio de Economía y Finanzas Públicas

Cuadernos de Investigación Económica Boliviana, 2023, vol. 6, issue 1, 3-24

Abstract: This study analyzes the dynamics and effects of inflation expectations in South American countries. The first phase employs the Kalman filter and state-space models to estimate unobservable time series of inflation expectations. In the second phase, the effects of shocks to expectations on key macroeconomic variables—such as inflation, GDP, and interest rates are assessed using Bayesian Structural Vector Autoregressive (BSVAR) models. The results indicate that, during periods of high inflation, expectations tend to rise, driven by inflationary inertia and heightened uncertainty. Conversely, during periods of low inflation, the gap between expectations and actual inflation narrows, reflecting greater accuracy in more stable environments. Moreover, shocks to expectations typically lead to increases in observed inflation, which in turn prompt interest rate hikes in most countries. The response of GDP to these shocks, however, varies across countries, demonstrating heterogeneous effects.

Keywords: Inflation; Expectations; State-Space Models; BSVAR (search for similar items in EconPapers)
JEL-codes: C11 C32 D84 E3 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:efp:journl:v:6:y:2023:i:1:p:3-24

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