Inflation-at-Risk in in the Middle East, North Africa, and Central Asia

IMF Working Papers, September 2, 2022

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Title: Inflation-at-Risk in in the Middle East, North Africa, and Central Asia
Authors: Maximilien Queyranne, Romain Lafarguette, Kubi Johnson
Date: September 2, 2022
Paper type: IMF Working Papers, Working Paper No. 2022/168
Core focus: inflation risks for 12 Middle East and Central Asia countries, with an equal share of commodities exporters and importers.

Leverages recent developments in the estimation of macroeconomic risks.
Uses a semi-parametric approach designed to balance flexibility and robustness for density projections.
Produces density-based projections (fan-chart style implications) for inflation-at-risk.

The paper uncovers distinct features of inflation dynamics in the region:
- Role of backward-looking versus forward-looking drivers of inflation.
- Presence of non-linearities in inflation dynamics.
- Heterogeneous and delayed exchange rate pass-through across countries.
Results carry implications beyond the sample, relevant for emerging markets in general.

Implications for the conduct of monetary policy in the Middle East and Central Asia:
- Policymakers should account for both backward- and forward-looking inflation drivers when assessing inflation risks.
- Non-linearities imply that standard linear policy rules may miss important tail risks.
- Heterogeneous and delayed exchange rate pass-through suggests the need for country-specific communication and policy calibration.
Implications for central bank communication:
- Use of density projections and risk-focused communication (e.g., fan charts) can improve transparency about inflation uncertainty and tail risks.

Subjects: Commodity prices, Consumer price indexes, Exchange rates, Foreign exchange, Inflation, Output gap, Prices, Production
Keywords: baseline inflation forecast, Central Asia, central bank communication, Commodity prices, Consumer price indexes, Emerging markets, Exchange rates, fan chart, inflation, inflation expectation, inflation expectations, inflation risk, Middle East, Middle East and Central Asia, monetary policy, North Africa, Output gap, Phillips Curve, self-reinforcing inflation dynamics

IMF Working Paper by Maximilien Queyranne, Romain Lafarguette, and Kubi Johnson (September 2, 2022).