Short Term Inflation Determinants in Barbados

27 Pages Posted: 1 Aug 2018

See all articles by Gregorio Impavido

Gregorio Impavido

International Monetary Fund (IMF); World Bank

Date Written: June 2018

Abstract

Inflation in Barbados is mainly imported. But how are external shocks transmitted to the domestic economy? Shouldn't there be also a domestic component, albeit very small, given the presence of capital controls? We focus on short term dynamics and contribute to the existing literature in three ways: (i) we identify the process with which inflation expectations are likely to be formed in Barbados; (ii) we add forward looking inflation expectations as one of the main channels through which external monetary shocks are transmitted to the economy; and (iii) we measure the importance of domestic shocks. We find that due to the peg, forward-looking inflation expectations in the reserve currency country are an important component of the inflation expectation process in Barbados and that they are a key channel in the international monetary transmission mechanism. Domestic factors, mainly monetary shocks, also matter given the limited degree of monetary autonomy provided by capital controls.

Keywords: Central banks and their policies, Exchange rate pegs, Western Hemisphere, Inflation, Monetary transmission mechanism, Oil prices, Barbados, monetary transmission, pegged exchange rate, capital controls

JEL Classification: E31, E58, F30, F41

Suggested Citation

Impavido, Gregorio, Short Term Inflation Determinants in Barbados (June 2018). IMF Working Paper No. 18/134, Available at SSRN: https://ssrn.com/abstract=3221219

Gregorio Impavido (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.imf.org

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
49
Abstract Views
292
PlumX Metrics