 Explaining and Forecasting Inflation in Emerging Markets: The Case of MexicoJeannine Bailliu (), Daniel Garcés, Mark Kruger () and Miguel Messmacher Staff Working Papers from Bank of Canada 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. Keywords: Inflation and prices; International topics (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:03-17 Access Statistics for this paper More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC. |
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