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On the Drivers of Inflation in Different Monetary Regimes
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On the Drivers of Inflation in Different Monetary Regimes

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  • Garcés Díaz Daniel

Abstract

This document proposes a general macroeconomic framework to analyze the behavior of inflation. This approach has two characteristics. The first is the distinction of monetary regimes based on the number of shocks that have a permanent effect on the price level. When all shocks have a permanent impact, the regime determines the inflation rate, as in inflation targeting. On the other hand, when there is only one shock with permanent effects, the regime determines the price level. An example of this is a regime with a fixed exchange rate. Even if there is no explicit target for the domestic price level, this becomes determined by the operation of a regime of this type. The second characteristic comes from the factors that Granger cause the rate of inflation or the price level. With this, a new perspective on four different historical cases emerges. One is the German hyperinflation; the second is that of the United States for a very long sample. For Brazil and Mexico, the analysis demonstrates that their inflationary processes' complexity arises from the regime changes they have gone through.

Suggested Citation

  • Garcés Díaz Daniel, 2020. "On the Drivers of Inflation in Different Monetary Regimes," Working Papers 2020-16, Banco de México.
    • Handle: RePEc:bdm:wpaper:2020-16
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    More about this item

    Keywords

    Pricing Equation; Money; Exchange Rate; Inflation Predictability;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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