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

M A -L L I , O I P R D E W O M O - S , O P D W P AC CR RO IN NK KA AG GE ES IL L RI IC CE ES S A AN ND D EF FL LA AT TI IO ON N OR RK KS SH HO OP J A 6– –9 9, , 20 00 09 9 J 6 2 AN NU UA AR RY Y Latin America GPM Applications Jorge Canales Kriljenko Roberto Garcia-Saltos

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

Outline of the presentation Background and motivation 1 Estimation Results for Latin America 2 Applications 3 A. In‡ation Targeting Under Stress B. Spillovers from the U.S. Financial Crisis Next steps 4 Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 2 / 17

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

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 LA5 Trade with World, the US, Europe, and Japan 70 (In percent of GDP) Coverage of the GPM_LA5 (share of World GDP) Rest of the World 60 2007 Japan BRA 2.8 European Union CHL 0.4 50 United States COL 0.5 MEX 2.1 40 PER 0.3 Total LA5 6.1 30 US 21.4 20 EU 16.1 JA 6.6 10 Total 50.2 0 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) Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 4 / 17

2. Estimation Results Highlights Output Gap Equation: Importance of foreign output gap y i , t = β i , 1 y i , t � 1 + β i , 2 y i , t + 1 � β i , 3 r i , t � 1 + β i , 4 ∑ j ω i , j , 4 z i , j , t � 1 + β i , 5 ∑ j ω i , j , 5 y j , t � 1 + ε y i , t Estimates of the Output Gap Equation Lagged Real Interest Rate Lagged Output Gap Lead Output Gap Gap BRA BRA BRA CHL CHL CHL COL COL COL MEX MEX MEX PER PER PER LA5 LA5 LA5 EU EU EU JA JA JA US US US 0 0.5 1 1.5 0 0.05 0.1 0.15 0.2 0.25 0 0.1 0.2 0.3 Lagged Foreign Output Gap Lagged Real Exchange Rate Gap BRA BRA CHL CHL COL COL MEX MEX PER PER LA5 LA5 EU EU JA JA US US 0 0.1 0.2 0.3 0.02 0.03 0.04 0.05 0.06 Source: Canales Kriljenko, Freedman, Garcia-Saltos, Johnson and Laxton (2008) Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 5 / 17

2. Estimation Results Highlights In‡ation Equation: Greater in‡ation inertia and exchange rate pass-through π i , t = λ i , 1 π 4 i , t + 4 + ( 1 � λ i , 1 ) π 4 i , t � 1 + λ i , 2 y i , t � 1 + λ i , 3 ∑ j ω i , j , 3 ∆ Z i , j , t � ε π i , t Estimates of the Inflation Equation Lead Inflation Lagged Output Gap Change in Effective Exchange Rate BRA BRA BRA CHL CHL CHL COL COL COL MEX MEX MEX PER PER PER LA5 LA5 LA5 EU EU EU JA JA JA US US US 0 0.2 0.4 0.6 0.8 1 0.1 0.15 0.2 0.25 0.3 0 0.1 0.2 0.3 0.4 Source: Canales Kriljenko, Freedman, Garcia-Saltos, Johnson and Laxton (2008) Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 6 / 17

2. Estimation Results Highlights Interest Rate Equation: The need to build credibility as in‡ation …ghters � � + R i , t + π 4 i , t + 3 + γ i , 2 ( π 4 i , t + 3 � π tar I i , t = ( 1 � γ i , 1 ) ) + γ i , 4 y i , t i γ i , 1 I i , t � 1 + ε I i , t Estimates of the Interest Rate Equation Lagged Interest Rate Inflation Forecast Gap Output Gap BRA BRA BRA CHL CHL CHL COL COL COL MEX MEX MEX PER PER PER LA5 LA5 LA5 EU EU EU JA JA JA US US US 0.1 0.15 0.2 0.5 0.7 0.9 1.1 1.3 1.5 0.1 0.3 0.5 0.7 0.9 Source: Canales Kriljenko, Freedman, Garcia-Saltos, Johnson and Laxton (2008) Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 7 / 17

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

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

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) 7 7 6 6 5 5 4 4 LA5 aggregate 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 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

A. In‡ation targeting under stress The economic slack may have vanished by end 2007 Output Gap in LA5 (percent) 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4 2001Q4 2002Q4 2004Q4 2006Q4 2008Q2 Source: Canales Kriljenko, Freedman, Garcia-Saltos, Johnson and Laxton (2008) Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 11 / 17

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) 2 2 1 1 0 0 -1 LA5 -1 aggregate -2 -2 -3 -3 -4 -4 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

A. In‡ation targeting under stress Policy responses in these 5 IT countries: …rmly geared to reduce in‡ation LA5: Historical Decomposition of Inflation 2004-08 (percentage points deviations from the estimated inflation target 1/ ) 7.0 7.0 3.0 3.0 3.0 3.0 LA5 Inflation and Target (percent) 6.5 6.5 2.5 2.5 2.5 2.5 6.0 6.0 2.0 2.0 2.0 2.0 Other shocks 5.5 5.5 1.5 1.5 1.5 1.5 5.0 5.0 1.0 1.0 1.0 1.0 4.5 4.5 0.5 0.5 0.5 0.5 4.0 4.0 0.0 0.0 0.0 0.0 3.5 3.5 -0.5 -0.5 -0.5 -0.5 Cost-Push Shocks 3.0 3.0 -1.0 -1.0 -1.0 -1.0 2.5 2.5 -1.5 -1.5 -1.5 -1.5 2.0 2.0 -2.0 -2.0 -2.0 -2.0 4 Q 2 4 Q 4 5 Q 4 6 Q 4 7 Q 4 8 Q 2 4 Q 2 4 Q 4 5 Q 4 6 Q 4 7 Q 4 8 Q 2 4 Q 2 4 Q 4 5 Q 4 6 Q 4 7 Q 4 8 Q 2 3.0 3.0 3.0 3.0 3.0 3.0 2.5 2.5 2.5 2.5 2.5 All shocks 2.5 Exchange Rate Shocks 2.0 2.0 2.0 2.0 Monetary Policy Shocks 2.0 2.0 1.5 1.5 1.5 1.5 1.5 1.5 1.0 1.0 1.0 1.0 1.0 1.0 0.5 0.5 0.5 0.5 0.5 0.5 0.0 0.0 0.0 0.0 0.0 0.0 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1.5 -1.5 -1.5 -1.5 -1.5 -1.5 -2.0 -2.0 -2.0 -2.0 -2.0 -2.0 4 Q 2 4 Q 4 5 Q 4 6 Q 4 7 Q 4 8 Q 2 4 Q 2 4 Q 4 5 Q 4 6 Q 4 7 Q 4 8 Q 2 4 Q 2 4 Q 4 5 Q 4 6 Q 4 7 Q 4 8 Q 2 Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 13 / 17

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

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 Domestic Output Gap Response to a one S.D. shock to US Output Gap ( Percent ) 0.15 LA5 0.1 0.05 BRA 0 CHL -0.05 -0.1 COL -0.15 MEX -0.2 -0.25 PER -0.3 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Source: IMF staff calculations, based on GPM_LA5 Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 15 / 17

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) 0.3 LA5 0.2 BRA 0.1 0 CHL -0.1 COL -0.2 MEX -0.3 -0.4 PER 0 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3 1 4 1 5 Source: IMF staff calculations, based on GPM_LA5 Jorge Canales Kriljenko, Roberto Garcia-Saltos (IMF) LA - GPM 1/09 16 / 17