Jorge Canales Kriljenko Roberto Garcia-Saltos Latin America GPM - - PowerPoint PPT Presentation

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Jorge Canales Kriljenko Roberto Garcia-Saltos Latin America GPM - - PowerPoint PPT Presentation

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SLIDE 1

Latin America GPM Applications

Jorge Canales Kriljenko Roberto Garcia-Saltos M MA

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SLIDE 2
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SLIDE 3

Latin America GPM Applications

In‡ation and Spillovers Jorge Canales Kriljenko Roberto Garcia-Saltos

IMF, Regional Studies Division (WHD)

January 2009

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 1 / 17

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SLIDE 4

Outline of the presentation

1

Background and motivation

2

Estimation Results for Latin America

3

Applications

  • A. In‡ation Targeting Under Stress
  • B. Spillovers from the U.S. Financial Crisis

4

Next steps

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 2 / 17

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SLIDE 5
  • 1. Background and motivation

Why use the GPM?

To build a …rst “regional model” that discuss both nominal and real variables in a multicountry setting

Five of the largest LA countries adopted in‡ation targeting at about same time Regional average is built using weights based on GDP-PPP Sample covers 2001.q4-2008.q2

Use of same speci…cation help us somewhat to compare the results across countries (including countries outside LA). However, we will incorporate speci…c country elements for the forecasting rounds.

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 3 / 17

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SLIDE 6
  • 1. Background and motivation

Growing importance of external linkages in recent years

In the last decade LA countries have become more integrated to the global economy, which could expose them more to global shocks

Coverage of the GPM_LA5 (share of World GDP) 2007 BRA 2.8 CHL 0.4 COL 0.5 MEX 2.1 PER 0.3 Total LA5 6.1 US 21.4 EU 16.1 JA 6.6 Total 50.2 LA5 Trade with World, the US, Europe, and Japan (In percent of GDP) 10 20 30 40 50 60 70 LA5 (94-00) LA5 (01-07) BRA (94-00) BRA (01-07) CHL (94-00) CHL (01-07) COL (94-00) COL (01-07) MEX (94-00) MEX (01-07) PER (94-00) PER (01-07) Rest of the World Japan European Union United States

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 4 / 17

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SLIDE 7
  • 2. Estimation Results

Highlights Output Gap Equation: Importance of foreign output gap

yi,t = βi,1yi,t1 + βi,2yi,t+1 βi,3ri,t1 + βi,4 ∑j ωi,j,4zi,j,t1 + βi,5 ∑j ωi,j,5yj,t1 + εy

i,t

Estimates of the Output Gap Equation

Source: Canales Kriljenko, Freedman, Garcia-Saltos, Johnson and Laxton (2008) US JA EU LA5 PER MEX COL CHL BRA 0.1 0.2 0.3 US JA EU LA5 PER MEX COL CHL BRA 0.02 0.03 0.04 0.05 0.06 US JA EU LA5 PER MEX COL CHL BRA 0.5 1 1.5 Lagged Output Gap Lagged Foreign Output Gap Lagged Real Exchange Rate Gap US JA EU LA5 PER MEX COL CHL BRA 0.1 0.2 0.3 Lead Output Gap US JA EU LA5 PER MEX COL CHL BRA 0.05 0.1 0.15 0.2 0.25 Lagged Real Interest Rate Gap

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 5 / 17

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SLIDE 8
  • 2. Estimation Results

Highlights In‡ation Equation: Greater in‡ation inertia and exchange rate pass-through

πi,t = λi,1π4i,t+4 + (1 λi,1)π4i,t1 + λi,2yi,t1 + λi,3 ∑j ωi,j,3∆Zi,j,t επ

i,t

Estimates of the Inflation Equation

Source: Canales Kriljenko, Freedman, Garcia-Saltos, Johnson and Laxton (2008) US JA EU LA5 PER MEX COL CHL BRA 0.2 0.4 0.6 0.8 1 US JA EU LA5 PER MEX COL CHL BRA 0.1 0.15 0.2 0.25 0.3 US JA EU LA5 PER MEX COL CHL BRA 0.1 0.2 0.3 0.4

Lead Inflation Lagged Output Gap Change in Effective Exchange Rate

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 6 / 17

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SLIDE 9
  • 2. Estimation Results

Highlights Interest Rate Equation: The need to build credibility as in‡ation …ghters

Ii,t = (1 γi,1)

  • Ri,t + π4i,t+3 + γi,2(π4i,t+3 πtar

i

) + γi,4yi,t + γi,1Ii,t1 + εI

i,t

Estimates of the Interest Rate Equation

Source: Canales Kriljenko, Freedman, Garcia-Saltos, Johnson and Laxton (2008) US JA EU LA5 MEX COL CHL BRA PER 0.1 0.3 0.5 0.7 0.9 US JA EU LA5 PER MEX COL CHL BRA 0.5 0.7 0.9 1.1 1.3 1.5 US JA EU LA5 PER MEX COL CHL BRA 0.1 0.15 0.2

Lagged Interest Rate Inflation Forecast Gap Output Gap

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 7 / 17

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SLIDE 10
  • 3. Applications

Real life applications that shaped policy advice in WHD during early summer (REO October 2008) and in recent Art. IV discussions (Mexico)

  • A. In‡ation targeting under stress
  • B. Spillovers from US …nancial crisis

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 8 / 17

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SLIDE 11
  • A. In‡ation targeting under stress

In‡ation in 2008 was on the rise

First real test for the improved policy framework Until recently the in‡ation surge was one of the leading policy issues in LAC

The task: explaining the sources of in‡ation

Supply shocks vs. Overheating? How was the monetary policy response?

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 9 / 17

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SLIDE 12
  • A. In‡ation targeting under stress

Historical decomposition of in‡ation pointed to signi…cant cost push shocks!

Contribution of Cost-Push Shocks to Headline Inflation 1/ (Percentage points)

  • 3
  • 2
  • 1

1 2 3 4 5 6 7

  • 3
  • 2
  • 1

1 2 3 4 5 6 7 LA5 aggregate 2004 05 06 07 08 Q2 Source: IMF staff calculations. 1/ Shaded area corresponds to the maximum and minimum contributions from individual countries' GPM's.

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 10 / 17

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SLIDE 13
  • A. In‡ation targeting under stress

The economic slack may have vanished by end 2007

Source: Canales Kriljenko, Freedman, Garcia-Saltos, Johnson and Laxton (2008)

Output Gap in LA5

  • 4
  • 3
  • 2
  • 1

1 2001Q4 2002Q4 2004Q4 2006Q4 2008Q2

  • 4
  • 3
  • 2
  • 1

1 (percent)

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 11 / 17

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SLIDE 14
  • A. In‡ation targeting under stress

Exchange rate ‡exibility played a crucial role in containing in‡ation

Contribution of Currency Appreciation to Headline Inflation 1/

(Percentage points)

  • 4
  • 3
  • 2
  • 1

1 2

  • 4
  • 3
  • 2
  • 1

1 2 LA5 aggregate 2004 05 06 07 08 Q2 Source: IMF staff calculations. 1/ Shaded area corresponds to the maximum and minimum contributions from individual countries' GPM's.

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 12 / 17

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SLIDE 15
  • A. In‡ation targeting under stress

Policy responses in these 5 IT countries: …rmly geared to reduce in‡ation

2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 4 Q 2 4 Q 4 5 Q 4 6 Q 4 7 Q 4 8 Q 2 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 LA5 Inflation and Target (percent)
  • 2.0
  • 1.5
  • 1.0
  • 0.5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 4 Q 2 4 Q 4 5 Q 4 6 Q 4 7 Q 4 8 Q 2
  • 2.0
  • 1.5
  • 1.0
  • 0.5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 Cost-Push Shocks
  • 2.0
  • 1.5
  • 1.0
  • 0.5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 4 Q 2 4 Q 4 5 Q 4 6 Q 4 7 Q 4 8 Q 2
  • 2.0
  • 1.5
  • 1.0
  • 0.5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 Exchange Rate Shocks
  • 2.0
  • 1.5
  • 1.0
  • 0.5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 4 Q 2 4 Q 4 5 Q 4 6 Q 4 7 Q 4 8 Q 2
  • 2.0
  • 1.5
  • 1.0
  • 0.5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 Monetary Policy Shocks
  • 2.0
  • 1.5
  • 1.0
  • 0.5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 4 Q 2 4 Q 4 5 Q 4 6 Q 4 7 Q 4 8 Q 2
  • 2.0
  • 1.5
  • 1.0
  • 0.5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 Other shocks
  • 2.0
  • 1.5
  • 1.0
  • 0.5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 4 Q 2 4 Q 4 5 Q 4 6 Q 4 7 Q 4 8 Q 2
  • 2.0
  • 1.5
  • 1.0
  • 0.5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 All shocks

(percentage points deviations from the estimated inflation target 1/ )

LA5: Historical Decomposition of Inflation 2004-08

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 13 / 17

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SLIDE 16
  • B. Spillovers from the U.S. …nancial crisis

The region is and will be a¤ected by the recession in the G3

Identi…cation of transmission channels at the country level is crucial

Trade e¤ects from the U.S. reduced demand for exports important for countries with tighter linkages Weaker commodity prices vs. exchange rate depreciation Credit crunch is landing in the region An important element is timing/composition of policy responses

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 14 / 17

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SLIDE 17
  • B. Spillovers from the U.S. …nancial crisis

Output shocks in the U.S. tend to a¤ect LA more than EU or JA in terms of size, speed and duration of impact

  • 0.3
  • 0.25
  • 0.2
  • 0.15
  • 0.1
  • 0.05

0.05 0.1 0.15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

LA5 BRA CHL COL MEX PER Domestic Output Gap Response to a one S.D. shock to US Output Gap (Percent ) Source: IMF staff calculations, based on GPM_LA5

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 15 / 17

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SLIDE 18
  • B. Spillovers from the U.S. …nancial crisis

E¤ects of shocks to the U.S. …nancial conditions are more persistent than U.S. output gap shocks

Output Gap Response to a one S.D. shock to US BLT (Percent) Source: IMF staff calculations, based on GPM_LA5

  • 0.4
  • 0.3
  • 0.2
  • 0.1

0.1 0.2 0.3 1 2 3 4 5 6 7 8 9 1 1 1 1 2 1 3 1 4 1 5 LA5 BRA CHL COL MEX PER

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 16 / 17

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SLIDE 19
  • 4. Next Steps

Incorporate China to the external environment Model the role of commodities. For LA5 will proceed using a generic commodity price index How would the region operate under a “ZIRP" in the G3? Financial conditions in LA5 countries (endogenous risk premium) Compare forecast properties

Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 17 / 17