Explaining Inflation in Colombia: A Disaggregated Phillips Curve Approach

Author/Editor:

Sergi Lanau ; Adrian Robles ; Frederik G Toscani

Publication Date:

May 10, 2018

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

We study inflation dynamics in Colombia using a bottom-up Phillips curve approach. This allows us to capture the different drivers of individual inflation components. We find that the Phillips curve is relatively flat in Colombia but steeper than recent estimates for the U.S. Supply side shocks play an important role for tradable and food prices, while indexation dynamics are important for non-tradable goods. We show that besides allowing for a more detailed understanding of inflation drivers, the bottom-up approach also improves on an aggregate Phillips curve in terms of forecasting ability. In the baseline forecast scenario, both headline and core inflation converge towards the Central Bank’s inflation target of 3 percent by end-2018 but these favorable inflation dynamics are vulnerable to large supply shocks.

Series:

Working Paper No. 18/106

Subject:

English

Publication Date:

May 10, 2018

ISBN/ISSN:

9781484354827/1018-5941

Stock No:

WPIEA2018106

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

29

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