The COVID-19 inflation episode: Lessons from emerging markets Full
e
so good morning and uh welcome to this
conference on the postco inflation
episode in Emerging Markets uh welcome
to Brookings I’m Jan Maria mes feretti
I’m a senior f fellow here at Brookings
at the Hutchin Center on fiscal and
monetary
policy and I just literally take your
couple of minutes of your time just to
say where this conference was conceived
or why um we thought about it because
the debate on the postco inflation
episode is very often limited to or just
focused on uh the case of the United
States which is of course very
interesting and very consequential for
what happens in the rest of the world
but at the same time it is also very
limited to look just at one country
given that there was clearly a big
Global dimension in the inflation
episode the pickup in inflation was
really WID spread across countries and
we thought Emerging Markets are
particularly interesting uh for a
variety of reasons uh the first one is
actually why why Emerging Markets given
that the policy support
that most emerging markets were able to
provide in particular with with fiscal
policy was more limited than the policy
support in advanced economies so it was
harder to think of generalized excess
demand pressures materializing in
countries where the push to aggregate
demand had been less uh strong than the
one we saw in many advanced
economies so thinking of what of the
triggers of uh the episode one factor
that uh pushes towards thinking of
inflation in Emerging Markets becoming
more of a
problem uh is the importance
of food and energy in Emerging Markets
uh inflation baskets so clearly the
global increase in Energy prices and
food prices was Central to the inflation
shock and in emerging economies
typically these Goods account for larger
fraction of CPI and hence mechanically
you would get a bigger inflation uh
shock so you had two counterveiling
forces in a sense here um third aspect
which is of particular interest is the
policy response which was way swifter in
many emerging economies some started
raising rates in the first half of 2021
well ahead of uh advanced
economies a fourth aspect was how
differentiated the increase in inflation
was inflation Rose everywhere but it was
clearly a different story in emerging
Europe and in Latin America uh Visa
emerging Asia where the initial rise in
inflation was more
modest in 2022 we had an additional
Regional shock uh which was the increase
in uh gas prices in Europe which had
dramatic implications for the cost of
gas and electricity in Europe I don’t
refer to I say limited to Europe because
surely there was also an increase in oil
prices but that is generalized across
countries the increase in gas prices um
uh gas being less traded than other
Commodities given the difficulty in
shipping it uh was very concentrated in
uh uh in Europe so we thought that just
these four points were more than
sufficient to generate interest for a
wide- ranging debate uh or a deeper look
into what happened over the past three
years this is why we asked uh uh Antonio
FAS we raet gak and uh Juan Pablo Medina
to write a piece uh on emerging e on
emerging Asia on emerging Europe and
Latin America and uh we’re going to
start with Antonio who is going to tell
us why emerging Asia uh was less uh
burned by the inflation episode than
other parts of Europe thank you can I
just mention one housekeeping thing so
this is on the record it’s being live
streamed so uh moderate your comments
accordingly
for inviting me to to be part of this
conversation as Jamaria said I think
we’ve talked too much about the US
inflation with our understanding how the
rest of the world looks like now uh uh I
was trying to figure out why emerging
Asia was different that’s the focus of
of my presentation the different part
why is it different from others now a
couple of things just to get us started
first different compared to whom now I’m
going to do a little bit of everything
compared to advanced economies compared
to other Emerging Markets compared to
similar episodes in Asia in the past
because I think all these things are
relevant when we think about different
to home and then a few things that I had
to deal with and I’m going to tell you
in advance of course when I talk about
Asia I’m going to generalize there
there’s a few countries that behave very
differently but I think there a pattern
I’ll talk a little bit about differences
but very fast every time I show you
averages because not always I can show
you all the countries you’re going to be
thinking this is dominated by a couple
of large economies and the answer is yes
China matters a lot in the averages at
the same time you’ll see when I separate
countries that while China is unique
it’s not that unique there’s a lot of
similarities between what happens in
China and the rest whenever it’s
relevant I’ll get rid of China and show
you an average without China sometimes I
will not because it doesn’t make any
difference now the issue of data is
always an issue when you try to look at
many Emerging Markets on low-income
countries sometimes there’s no data on
certain variables so my samples will not
always be the same so be careful always
check how many countries I have in a
sample I’ve done my best to try to
compare similar samples if I ever
thought that was an issue but there
going to be an uneven coverage and some
might be thinking we’re presenting these
papers too early because the inflation
episode maybe is not over maybe some
interesting things are about to happen
again I we can only speculate on that
going forward now let me just say
something really fast about before 2019
how did we think about inflation in Asia
and other countries and lots of Papers
written this is not a comprehensive
literature review for sure we used to
think that inflation was dominated by
global factors increasingly so over time
so we used to think about global shocks
of course many of us we’re thinking
about the Philips curve and any other
similar Frameworks to think about
inflation both in advanced econom and in
Emerging Markets we used to have the
view that inflation targeting was good
was good to reduce inflation but also to
reduce the Persistence of inflation and
then we lived in an environment where in
advanced economies we were struggling in
some cases with below Target inflation
that was our concern and in emerging
markets in particular in Asia we had
seen a really significant structural
decline in inflation over the last two
decades and if you look at some of the
most recent years maybe not the last
five but the last 10 we had seen a
little bit of what I would call an
opportunistic disinflation as commodity
prices had come down some of the Asian
economies had seen a significant
decrease in inflation so you see a nice
Trend coming into
2019 now it all of course fell apart in
2020 like everywhere else inflation
increased now some very broad statements
that I’m going to back by data in a
second inflation increased by a large
amount in advanced economies not so much
in emerging markets in fact I would say
most of these Emerging Markets I would
say the increase is not that unusual
unusual compared to previous episodes
now Asia is to me a little bit of an
outlier because not only the level of
inflation was lower but also the
increase was lower now let me show you a
few slides I’m going to try to show the
slides that are more meaningful this is
a way to compare advanced economies to
Emerging Markets before I say anything
about Asia on the left hand side you see
advanced economies whose inflation was
high now I’m using 5% as an arbitrary
number on the right hand side Emerging
Markets where inflation was high I’m
using 10% as an arbitrary number and
this is counting countries I could also
do a share now you can see in advanced
economies this looks a lot more
impressive the last Spike while in
Emerging Markets you see a spike it is
smaller than in
2009 again there’s other ways to show
you the same outcome thinking about
average inflation there is a spike but
it’s not that unusual compared to other
episodes in Emerging Markets now what if
we look at Asia in particular if you
look at the left hand side you see green
Asia uh you can see this is headline
inflation I’m starting in the year 2000
so just looking at more recent data you
can see a spike around 2021 but that
spike is quite limited and if I didn’t
have the other lines it would be hard to
say there was something really special
in 2021 it’s is a cycle like some of the
others in fact more moderate than some
of the others now if I bring all the
Emerging Market groups which I do on the
right hand side now the spikes there
which have to do with Liars in other
regions not Asia so I’m not going to
talk about them in Europe you have
according to the IMF classification you
put turkey and Russia so you see a
spikes there which are driven by large
countries with very high inflation now
the line which is Asia in this case I’m
going to exclude China just so that you
not think in this all about China you do
see a little bit of a spike at the end
but but again it’s quite limited and
similar to previous spikes that we’ve
seen in other
Cycles now what about if you start
looking at individual countries just in
case the average is hiding in lots of
things on the left hand side a few large
Emerging Markets apologies that is hard
to put all these colors in a way that is
easy to see China no inflation at all
during this episode India is in yellow
there is a spike of inflation but once
again similar or lower than in previous
episodes much bigger spikes if you’re
sitting in Brazil if you’re sitting in
Mexico of course if you’re sitting in
Nigeria or if you’re sitting in Poland
so these are a few large Emerging
Markets you see the same pattern across
regions now a little bit of of sort of
diversity on the right hand side so this
is all the Asian economies Emerging
Market Asia each line is one country and
the average is dark there is some
variation to WS the end you see two
spikes those are Sri Lankan Laos so yes
if you want to find High inflation in
Asia you will find it but but it’s a
little bit the exception not the rule
and again the average is the same as
before is quite
flat now here comes a question that J
Maria mentioned in his introduction in
many of these countries food price and
energy prices are very important uh so
how did Asia behave in these two sectors
again they’re very important
mechanically they’re a high percentage
of the CPI again you see the same
pattern as in the headline inflation
both in food price and energy price Asia
has the lowest inflation rate and it has
the lowest jump and it depends how you
present the data sometimes it’s hard to
see on the right hand side when you
compare to Europe of course the scale
becomes very large but if you just look
at both green lines on both charts you
see lines which are very flat in both
cases so again once again it just the
same message comes through all these
slides Asia is a little bit of an lier
here inflation did increase but
inflation did not increase that much
compared to other countries that much
compared to other similar episodes now
that was just to give you an overview of
how I See Asia now the question is why a
lot of what we going to try to figure
out today why was it
different now here I’m going to take
what I’m going to call the accepted
framework that we all have today with
some questions about what led to the
pandemic inflation or the post pandemic
inflation now my discussion has a paper
that was presented here a couple of
years ago what happened in the US
there’s tons of paper that have been
written about this now this is the way I
read the consensus first the global
component in this episode is really
large in fact the book The CPR book that
just came out and was presented here at
at the Peterson Institute on Friday says
is even bigger that Global component is
even bigger than in previous episodes we
all agree that Supply shocks whether
it’s supply chain shortages or Ukraine
matter a lot to all countries so I’m
going to start with that assumption and
then we all understand that cyclical
conditions were not the same everywhere
so we had a lot of conversations about
labor market tightness in the US and of
course about policies and here I’m going
to explore uh both policies fiscal and
monetary when it comes to fiscal I’ll
say something about conventional fiscal
policy by that I mean just aggregate
demand stimulus unconventional by that I
mean price subsidies trade restrictions
and then I’ll have to say something
about monetary policy I’ll talk about
the interest rate response was it
different across countries does it fit
the data and what about something which
is much harder to measure but I’ll try
to do something about it what about
credibility and anchoring of
expectations did that
matter now let me start with the
cyclical conditions now typically if
you’re doing a paper on the US you’ll
run a Philips curve with unemployment
and things will work quite nicely unfort
fortunately you try to do the same thing
for other countries which I will it is
harder and it’s harder because
unemployment does not look like we is an
employment
everywhere it even looks less during the
current cycle so first this is a view of
the data just to get a sense of what it
looks like unemployment did increase in
the in the pandemic during the pandemic
but it increased in ways which is
sometimes a little bit noisy spike in
Asia spike in Latin America you don’t
see much in in Europe now you don’t see
much in advanc Europe either because of
policies to keep unemployment constant
but again that’s a little bit hiding the
lack of activity in those months or
quarters you see a little bit very
little the subsaharan Africa so here
what you see first there’s a lot of
behavior of unemployment which does not
look like the US in any cycle in this
cycle was even more different now if I
cannot use unemployment what can I use
something that is based more on activity
GDP P production but then you need a
measure of slack and that is hard
because we need to construct the measure
of the output cap which is not easy I’m
going to do it anyway so this is what
I’ve done to construct this
indicator now I’m going to take an
approach which is let’s just look at one
Cycle One cycle I mean I’m going to
start in 2010 post the global financial
crisis we have an expansion which is
quite stable in the world in fact if you
look at growth rates around the world
they’re the most stable table they’ve
ever been in any expansion so you take
that as the trend whatever happened
between 2010 2019 you extrapolate that
Trend and then you look at deviations
from that Trend post
2020 now I know it’s not perfect but it
gives us an indication of what growth
rates look like compared to the previous
expansion growth rates now I have the
all the mergings Asia Asia without China
and a couple of other regions now what
do you see 2020 very similar across the
board so very similar large negative
numbers but then if you look at Asia or
Asia including China which is the orange
and the and the gray they remain quite
low for 2021 2022 even
2023 which means can remember how I buil
this growth rates in Asia did come back
to normal but they never overshoot
normal so you never close the gap that
you had open during the crisis
is this truly slack maybe it could also
be that was a structural breaking growth
rates that’s possible I don’t have an
explanation of why that would happen in
Asia and not anywhere else now my
argument is even if there’s a little bit
of that and structural breaking growth
rates one could argue that it could
affect inflation as well and it depends
a little bit what we mean by structural
so I take this as a view that demand
conditions were weaker in Asia than in
other countries that goes a little bit
in the direction of explaining lower
inflation now I’ve done similar output
gaps using quarterly data I didn’t say
it but the previous chart with annual
data because there’s no GDP for many
countries quarterly now you’re not going
to see colors here but I can guarantee
you the last three lines are the three
Asian economies if you use quarterly
data so India Indonesia and the
Philippines had an larger output Gap
that any of the Latin American countries
there or Poland or South Africa so same
message comes through now is this truly
an output Gap do we know why this
happened and I think we have a partial
answer of why this happened if you look
at the reopening from covid restrictions
was not the same in every region now as
someone who was living in Asia during
those years I can guarantee that they
were not the same if you do a quick
analysis of one of these stringency
indices of covid restrictions what I’ve
done here is taken an average from the
countries in the previous chart just to
much the same countries so Asia means
the three countries that were in the
previous chart Latin America the four
countries that were there now the Asia
line is the one that is on top of
everyone in particular in 2021 and 2022
so 2020 of course was very similar
across the globe but then the reopening
was much slower which sort of coincides
with the timing of the output Gap that
you see in my previous slides so again
even if it’s hard to measure the output
Gap I do think the combin ation of what
you see here on the previous two charts
I think they signal that the demand was
weaker in Asia than in other
countries so let me try to put this into
some quantitative framework can this
explain some of the difference in
inflation in Asia how much here I’m
going to run some Philips curve type
regressions I’m going to start with
unemployment even if I don’t have a lot
of faith that this is going to work and
it’s not going to work the way I think
it should only look at the boxes in Red
so across all columns unemployment comes
with the right sign this is data from
2000 all the way to the end of 2023
quarterly data fix effects time effects
everywhere so the first line makes sense
and employment comes with a negative
sign now I want you to focus to the Box
on the right hand side what I do there
is the following in column four I have
dummies for all the EMD regions post 20
20 so I’m trying to understand how
different was inflation in these regions
relative to what relative to advance so
Advance is by Benchmark in this
regression so if you focus on Asia minus
2.4 says inflation in Asia was 2.4
percentage points lower than in advance
after adjusting for fixed effects and
time effects time effects doesn’t matter
but fixed effects do matter now I add on
colum five the unemployment rate does
the coefficient change does the behavior
of unemployment help me explain that 2.4
difference and you can see barely the
coefficient barely moves so it seems
that if you throw cyclical conditions
measured by unemployment you don’t get
much mileage what if I do the same thing
using my measure of the output Gap so
same thing it almost looks the same but
the coefficients are different focus on
the small box on the right hand side now
I get more of a mileage if I use my
output Gap measure of a slack so now I
go from a 3% difference now the reason
why it’s three and not 2.4 is the sample
has changed because not all countries
have GDP measures so 3% is sort of the
starting point once I add cyclical
conditions that difference goes down to
two so if you want I explain with this
regression about onethird of the
difference of inflation in this case
relative to advanc economies again I
don’t think that’s a small amount
assuming I’m getting everything right
the the this part of the inflation
Dynamics in Asia that can be explained
by these cyclical
Dynamics now let me try to go from here
to policies let me start with fiscal
policy first conventional fiscal policy
here I’m just going to do something very
quick I’m not sure how is is to
translate this into a number so if I
look at the conventional fiscal policy
how much did the structural balances
change in Asia compared to other
countries I’m using here Asia including
China if I include China is very similar
ilar so you see there was a decrease
like you expect everywhere else but it
was smaller than in advance smaller than
in Europe smaller than in Latin America
all of these are emds it was larger than
in subsaharan Africa but relative to the
other three groups clearly the fiscal
impulse was a smaller in Asia which is
sort of consistent with a larger output
Gap that I’ve seen before now I’m not
sure I can take take this number and
tell you how much it explains of
inflation in theory if fiscal policy
fits into output all the effects were
already captured in my previous table so
I’m not sure this is adding anything
maybe story that goes with the previous
slide but I did want to to show you
these numbers now the other part that I
wanted to look at is the unconventional
fiscal policy again we said food prices
matter Energy prices matter food prices
matter even more than Energy prices in
the CPI we’ve seen food prices did not
increase much in Asia could it be the
subsidies that played a role everywhere
in the world matter more in in Asia than
in other countries now I’m borrowing
this from an IMF database uh that
calculates how much were these subsidies
compared to GDP so I’m focusing on the
two boxes in Red so that’s Asia now if
you compare with the other rows quickly
there are the other Emerging Market
regions and advanced economies on the
first line you can see the numbers are
quite big in particular on the last
column so food subsidies in in Asia were
a lot bigger than in other countries as
a percentage of GDP now I’ve done my
best to look in the literature to see
how I translate that into an inflation
effect I have not found a great paper
there’s a few of those and they give you
some estimates but I’m not sure they
would apply to this particular event so
I I don’t have a quantitative assessment
that says and this bought this much of
inflation but at a minimum it goes in
the direction that is consistent with
what Us in food price inflation but is
also consistent with the overall
inflation now what about monetary policy
uh now here we can do lots of things I’m
just going to give you two messages
which go in the direction of explaining
some of it so these are interest rates
of a few countries now I’m going to
focus on the right hand side so that’s
the real interest rate so Central Bank
interest rate minus inflation this is
contemporaneous
inflation now if you look at India in
yellow Indonesia in blue hopefully you
can see the South Africa in red let me
start with those three very similar
response in real rates so they move real
rates by similar amounts around this
episode now what do you see bigger
differences the US took forever to get
to the same place so they move much
slower and I don’t think that’s a
surprise to any of you that’s advanced
economies move slower now Poland move
even slower I think what happens there
inflation really spiked in Poland so the
real rate looks very low and then what
you see an interesting contrast in Latin
America real rates increase
significantly more so in Mexico and
Brazil you see uh bigger increases so
here is the the contast that I see in
particular more interesting to me is
Latin America versus Asia now here comes
a question which is not easy to answer
do higher r rates means that inflation
should be lower and it depends how you
think about credibility anchoring of
expectations and how much of a real rate
you need to make sure that expectations
of inflation stayed anchored now here
I’m going to speculate both Brazil and
Mexico have a recent history by reason I
mean before
2020 of much higher inflation and much
more volatile
inflation that this Central Bank had to
hit the breaks a little bit harder maybe
to get to the same place or maybe to get
to an inflation rate that was slightly
higher than in Asia so that’s as much as
I can see here I don’t see very large
differences between many Emerging
Markets but I do see that in Latin
America real rates were higher so if I
took that chart as it is it doesn’t say
that Asia was tougher than other
emerging markets at all I don’t see it
just by looking at real
rates now
how can I see credibility of central
banks how can I think about uh that that
matter the history of inflation I’m
going to do two things one look at
exchange rates so exchange rates could
react to the possible sort of expected
inflation that people saw after 2020 and
countries with low credibility are
likely to see bigger depreciations of
the exchange rate now that’s what you
see so the top two lines the green line
and the blue line are Asia so whether
you do Asia as a whole or Asia with a
China exchange rates did not move much
in fact Asia as a whole there was a a
small
appreciation if you look at the other
Emerging Market there was significant
depreciations so I read two things here
one which is important but hard to
capture or measure which is the
credibility of different central banks
was different and the exchanger reacted
differently the second thing that I see
if you believe in exchange rate passed
through here you start seeing another
reason why inflation was low in Asia
because the exchange rates did not
depreciate now I’ve done an attempt to
put a number to that so this is the same
Philips curve that I was writing before
focus on the red thing I throw the
nominal effective exchange rate you get
a sign which is consistent with the
literature you get a coefficient which
is on the high range of the literature
but it’s not completely crazy and if you
do a quick back of the envelope
calculation given how much exchange
rates depreciated in other emerging
markets you could sort of justify five
to six percentage points during those
two years in those countries relative to
Asia again that is also a significant
difference if you were to do a
mechanical calculation maybe a little
bit too optimistic but but again goes in
the same direction and if you take this
literally it also explains a big chunk
of the inflation
differential now here comes my last
regression this comes partly partly from
a suggestion that is still made in the
preconference uh event that we had so I
was trying to capture somehow how The
credibility of the Central Bank matter
for what we’ve seen so what I’m doing
here is completely different
cross-section let’s look at the jumping
inflation from postco preo and we could
take a couple of quarters I’m taking the
whole sample can we explain the job in
inflation using just two variables how
high your inflation was before the
pandemic and how volatile inflation was
in the five years before the pandemic we
could do three 10 I did five now there’s
a couple of different samples all
countries Emerging Markets full means
all countries that I have data for small
means countries that are consistent with
previous samples that I’ve shown you so
just to see if it matters which sample
you use the coefficients always have the
right signs and become more significant
than others but what you can see here is
a very strong result that says High
inflation before matters a lot for the
the change in inflation not the level of
inflation so the surprise of inflation
was much bigger in countries that
started with high inflation and the
volatility as well which is the point
that I was making before and to me these
are two indicators of The credibility of
the central banks before this episode
the RS square is as high as 40% in the
last column that’s a big amount relative
to the volatility we want to
explain now unfortunately this does not
correlate with some of the measure of
transparency and Independence of central
banks that we all use because that was
my goal to use these measures to see if
I can buy some of these result but I
cannot so here if you look at measures
of transparency and Independence of
central banks Asia doesn’t look very
good compared to other EMD regions so to
me the level of inflation the volatility
has worked a lot better so I’m done here
again my answer I think is
straightforward I’m using the framework
that we’ve used for the Us and other
countries and I conclude that Asia had
weaker cyclical conditions and I said I
can explain one point out of the three
in those regressions that is consistent
with weaker fiscal policy impuls and
their slow reopening is consistent with
a stronger unconventional fiscal policy
food subsidies particular I didn’t say
this but it matters luck rise prices did
not go up as other commodity prices and
that matters for Asia pork prices
started stabilizing or going down in
China that had to do with the swine flu
again that was pure luck and then
there’s the issue of policy in
particular I think the history and
credibility of monetary policy and the
potential effect through exchange rat to
me matter more than the response of
interest rates where I don’t see a big
difference so it has to be something
more fundamental about credibility
anchoring of expectations and possibly
through the exchange rate thank you
thank you so much Jan Maria for giving
me the opportunity and Antonio thank you
very much um I’ve worked a lot on US
inflation but I’ve lived I am from India
and have Liv lived inflation in India
have both high and low um so I have to
say this gladly I have to say this only
for two months because actually I’m
going back to India so this is
um so so let me start by summarizing I
think Antonio did a fantastic job um I
think the key stylized fact uh which
Antonio documents very nicely in his
paper through several charts you you saw
is um basically inflation in Asia um uh
was high was was relatively muted not
only relative to advanced economies we
know that but also relative to other
emerging and developing economies um why
is that again Antonio’s last slide
summarized it quite nicely but let let
me give a summary of the summary I think
there are three main reasons uh which
Antonio highlights one is U still
existing slack in these economies or
weak post-pandemic recovery which was
actually related to high restrictions
and stringency during during the
pandemic um second is fiscal policy and
and interestingly um Antonio highlights
two aspects of fiscal policy one is
conventional fiscal policy which is
captured through the slack but then
unconventional fiscal policy which
includes price control subsidies which
we also saw in Europe by the way I think
there is a um and third is monetary
policy interestingly monetary policy was
less aggressive in Asian economies
relatively less aggressive even relative
to say you know Latin American economies
which raised much raised rates much
earlier and much higher um yet inflation
expectations were well anchored and
there was limited depreciation of the
exchange rate despite less aggressive
monetary policy so it’s not that
interest rates increased a lot and
that’s why you saw less uh depreciation
despite interest rates being um being
you know low Rel real interest rates
being low yet you found you know
inflation expectations to be well
anchored and there was limited uh so
there’s a subtle I think um uh message
in this I thought which was quite
interesting so I think let me first
highlight the contribution I think some
of these facts I have to say are well
known at least discussed a lot in um you
know uh discussed a lot by policy makers
especially Asian policy makers that look
unlike the us we did not give big fiscal
impulse and we we never had the
inflation problem so you know you hear
this a lot in the politic
commentary um what I found very
interesting was um that Antonio puts
numbers and quantifies these effects and
you know makes us you know see some of
these effects in um on in the nice
pictures which he which he presents
which I think is a real contribution to
quantify some of the you know some of
the commentary which we are seeing which
we’ve seen in policy and to see some
numbers attached to
those um my first comment is on
um the link between Theory and impact
lyrics and I think here the paper could
actually do a bit better and you know to
be embarrassed I’m going to you know
highlight some of my work but I think uh
it’s it’s more because you know I’ve
worked with these Frameworks and um so
there is um The Brookings paper which we
which we presented a couple of years ago
but there’s also um you know we are
extending the Brookings framework uh for
an NBR conference on inflation in May
where we are we are looking at a wider
sample of countries which will include
Asia as well and I’ll show some teasers
from from that ongoing going work so
here I think our framework is very very
simple we say headline inflation is um
is basically you can think about it as
core inflation and headline inflation
shocks and core inflation is really
underlying inflation so you’re you’re
trying to um U you know core inflation
is the basically the textbook inflation
which depends on uh labor market
tightness and expect and inflation
expectations and we measure it by and
and we find that measurement of core
inflation is quite important so we
measure by weighted median which which
strips which is not only xfe that is you
know excluding food and energy but
excluding you know any of the volatile
Industries which was particularly
important during the pandemic because
during the pandemic if we use x XF
inflation it’s very erratic we cannot
correlated with anything so I think the
measurement is um fairly important and
second is these headline inflation
shocks these are high frequency shocks
relative price changes in particular
Industries um not only you know food and
energy again during the co during Co uh
we saw travel Autos all these um so this
is you know basically and the measure of
headline inflation shocks the deviation
of headline from core so this is a
simple framework and I want to read some
of the evidence in terms of you know the
framework um uh you know again a very
simplified framework so this uh Antonio
showed the results on Headline inflation
but if you think you know textbook
really you would relate core inflation
and the results on core inflation are
very interesting because I think I’ll
just focus in the interest of time just
focus on column five and you can see
that in column five and whatever measure
of unemployment rate we have once you
includes slack the coefficient I don’t
know if the pointer is working is it
working oh no no it’s not working okay
so the so the coefficient on Asia is
basically statistically
indistinguishable from zero as you see
so then I asked myself so this means
that basically does it tell me that you
know if if a really good textbook core
inflation whatever measure you have
it tells me basically it’s all about
slack and you showed these nice pictures
on um output Gap and you know slack as
best best as you can measure um but then
it’s really inconsistent with some of
the other stories you telling about you
know unconventional fiscal policy
monetary policy so that’s why I thought
you know um looking at headline
inflation shocks separately is very
important and again you showed here how
um you know Energy prices and and and
and food prices were relatively more
muted but if you think you know if you
think about Theory you have to first of
all look at it in relation to the core
inflation so relative prices so I you
cannot just look at food and energy but
relative to core you have to see how
these evolved in um in Asia relative to
other emerging emerging economies so I
think again thinking through um you know
um and not only energy and food prices
but I don’t know what other prices
relative price shocks were there in Asia
so thinking a little bit in terms of
headline inflation shocks I think would
add a little bit of more structure to
the
analysis this is again you know some
work which we are doing as I said um uh
with co-authors extending um the
analysis to a wider set of countries and
let me show you just a teaser slide here
and um though it’s you know this is a wi
sample of countries both Advanced and
emerging and you can see this this is
basically showing you um uh the rise to
Peak so basically how inflation Rose but
also how inflation fell from PE to the
latest and you if if you look at you
know some of the Asian economies here
for example um if you look at Thailand
here um Thailand is relatively one of
one of the Asian economies which had a
large rise to Peak but also you know
fell as well and you can you can
decompose it into core and the headline
inflation shock and you can see that in
the case of Thailand for example
although the red the headline inflation
shocks were the big contributor but
there’s a little bit of contribution
from core slack as well again if you
look at see Malaysia Malaysia is is is
among Asia it’s after Thailand so so the
change increased to Peak is relatively
smaller but I think the interesting
thing is it’s also all red so basically
it’s all headline inflation shock and
and and you can see the asymmetry
between um the increase and the fall as
well and then if you look at India India
is also very interesting it’s the
smallest in in you know the entire in
the entire pack but it’s half and half
divided between uh the red and the blue
so it’s what’s happening in India is
quite interesting because you know
although the output Gap was negative or
there was slack it was in it it was
moving towards zero move to the so it
was moving towards zero so basically a a
you know you can see that um you know
the output Gap is closing in that sense
so that’s why it’s contributing to
inflation so I I think one of my broad
comments is that you know unpacking a
little bit um um slack versus headline
shocks and highlighting some of the
stories of heterogenity even within Asia
might add some flavor to the
paper um and as I said you know there’s
in addition there’s heterogenity also in
the drivers of headline inflation shocks
for example Energy prices and exchange
rates were the two top contributors in
Malaysia energy food and shipping cost
were the top contributors in in in in
Thailand whereas in India it was more a
lot of you know ship you know Supply
delivery times backlogs Etc so this
chart basically showing um the headline
inflation shock and you know it’s
showing the dotted line is the predicted
based on these three variables and
um the black line is the actual and you
can see that these three variables
basically explain um the evolution of
headline inflation shocks almost
perfectly in perfectly in the case of
India um and then you know I think
another thing to highlight and this I
don’t know to what extent was it
important in the case of Asia but this
crisis was really a lot about
nonlinearities and this is for the US
and but but we have you know when we
extending it to other countries we are
seeing similar patterns even for Asia
and um the left chart basically shows
the nonlinearities um with respect to
slack and here of course with the us we
have better measure so you know V over
you and on the right hand side it’s
nonlinearity with respect to headline
inflation shocks and you can see very
nice you know um feathers and Rockets
rocket effects for headline inflation
shocks so when headline inflation shocks
are are low you have very you know the
effect on um um you know the effect on
inflation is fairly mutant but it
increase a very fast rate if headline
inflation shocks are are high and as I
said you know I I don’t know to what
extent was it true e although you know
overall inflation was relatively muted
were there asymmetric and nonlinearities
in the case of Asia too I think could be
could be um explored in your in in your
framework as well um and then you know I
think um as you know Ben banan and
Olivia Blanchard have this project with
a number of central banks this mostly
advanced economies but one thing which
they highlight which I find very
interesting that initially the pandemic
era inflation was really um a result of
these relative price shocks so relative
price shocks as they increased you have
this initial burst of inflation and as
relative price shocks faded headline
inflation is coming down however the
labor market is still hot and the effect
of slack is is something that might
persist so here again you know I think
getting some sense of um whether you
know uh you know how you know how the
labor market is evolving and how the
slack is changing over time and how does
it continue to be negative or is it
closing would some you know would be
something interesting to note to get a
of inflation going forward in the case
of um Asia so as I said even in the case
of India even though output Gap was
negative it was closing and that
contribute actually contributed to
inflation um in the case of
India with this um let me conclude um I
think it was a really nice paper very
important contribution the main
contribution I see in terms of
quantifying some of these effects and
some of the narrative we are seeing by
uh especially by Asian policy makers um
I think my main comment would would be
you know three-fold I think putting you
know linking a little bit more to Theory
and putting a framework to all the
interesting findings you have um
unpacking some of the heterogeneity even
across Asia like I showed you India
Malaysia Thailand were quite different
and third is maybe I don’t know if they
exist if there are nonlinearities and
some of the effects thank you very
much thank you PRI and um would open the
floor for discussion but maybe let me
just give a chance to Antonio to if he
has any uh quick thoughts uh and then
we’ll we’ll open up the floor for
discussion thank
you so very yeah I’m I mean thank you
very much for your comments um I think
you’re asking me to do a couple of
things that I wanted to do at some point
some of them I’m not sure there’s enough
data to conclude but maybe I can go into
specific examples I think the coring
inflation headline inflation uh is an
interesting one I mean as you’ve shown
I’m using a measure of core inflation
that comes from a database that ihan and
Kors have have have produced for
emerging markets and you get some
results again I think it’s just hard to
measure core inflation for these
countries maybe at some point we can
talk about how you’re measuring for your
project and maybe there there’s better
ways of doing things um and then the
other thing I think that you’re saying
is true I think looking at some
individual Asian countri and looking at
diversity I think that can be useful
I’ve done some of that which is not in
the paper to see whether the aggregate
was meaningful but I think the
difference between Thailand where sort
of food subsidies were a lot smaller
than Indonesia for example I think is
interesting or India where food
subsiders were stronger looking at the
role of of sort of the the output Gap in
different countries I think that can
help me understand some of the data um
again the nonlinearities is the
trickiest one I think that that I’m not
sure how much I can do but but I think
the other ones for sure I think I should
do more of that thank
you thank you Antonio so let me open the
floor for discussion uh maybe you can
just stand
your perfect
Phil great um tremendous uh discussion
tremendous papers well well done one one
thing that I’ve been struck by in the
last few years in Emer
Asia is and it’s something you actually
see across the the whole world is the
narrowing or the inversion of the gap
between the high inome countries and the
lwi income countries so I wondered if
you could dig a little more into that
issue because one thing that strikes me
as I won’t say puzzling but you know
kind of very interesting is that you
know if you take a weighted average of
say Taiwan Singapore well what I used to
call I still call the Knicks because I’m
I’m an old guy but take the nck average
inflation rate and compare that to the
the low in well lower income countries
you know the malaysias the thailands
indonesias you know that that Gap used
to be significantly higher in the lower
income countries pre pandemic and then
flipped and has stayed the differential
has stayed flipped you know they’re both
sort of moving down and up together but
but there’s this sustained Gap and I
wondered if you had any sort of
explanations as to whether this or any
thoughts as to whether this is a sort of
just a matter of luck matter of cyclical
structural developments or or perhaps
reflects good policies in some of these
lower inome countries so you’re sort of
seeing superimposed on the pandemic
effects the sort of benefits of a long
run effort to to to go to lower
inflation maybe we collect a couple of
questions first and then give you the
floor back Antonio I
thank you thank you uh Antonio it’s
great um
the these are just questions actually
the first one when I think about Asia
versus other regions especially the
regions in this uh
Workshop I I wonder to what extent
prices especially certain prices
administered in these countries in Asia
versus Europe
I’m going to make a guess the extent of
administered prices larger in Asia than
for example uh emerging Europe uh take I
mean the price of electricity price of
uh oil um and those make a big
difference when it comes to how
inflation moves huh especially
headline the the second thing is uh when
you are comparing Asia versus other
regions uh uh and this is to me a
simpler exercise than the exercise you
are trying to run here with the um the
the
Frameworks uh what is the extent of
exchange rate pass
through in this region versus other
regions because some of these shocks are
really common shocks uh uh and and the
how it affects the kind of the the
inflation is going to depend on the pass
through and um third question
is how different inflation Targets in
this region versus other Emerging Market
regions I think that that’s also very
useful in terms of thinking about uh
policy response but the great great
paper
Steve um thank you that was very
interesting paper um actually just
following up on aon’s uh first remark uh
I asked a uh uh the Asia Economist for
City Bank the same question why is Asian
inflation so low and and she suggested a
couple of other reasons besides the well
besides the one discussed by Antonio one
of them is following up on ion’s comment
is uh price controls uh is there much
evidence that price controls were more
pervasive and more effective in in the
Asian countries than
others a second consideration and I’m
not sure how much weight to put on this
uh was mentioned was that those same
Supply uh chain disruptions that led to
higher prices in advanced economies had
the effect of bottling in Goods in Asian
economies and thus lowering their price
I was wondering what you thought of that
and then finally uh I was very uh
impressed with the result on exchange
rates and how those also help to dampen
uh inflation uh in Asia and I was
wondering how much of that actually
might have reflected active uh ex
Exchange Market
intervention uh by those economies as
opposed to just the kind of like free
market responsive exchange rates thank
you
Dave uh just to say I really enjoyed the
paper and and you know being also based
out in in Singapore I I and found that
intuitively it matched up to a lot of
the uh sort of more microanalysis that
people have done and I so just uh I
thought the demand conditions being
weaker elsewhere in the region I think
about you know places like Korea and and
Taiwan where even the headline growth
numbers might be you know mask actually
domestic demand conditions being quite
weak this whole time and aside from
their Tech exports you know you would
still have uh uh still weak demand
conditions that certainly seems to Jive
and also seems to Jive these
unconventional policies uh and I guess
this is kind of what Steve was also
saying that that you know things like
food subsidies really did seem to be
larger and I was just C because you you
had a chart there which I think was IMF
compiled uh a 1% of GDP almost which is
quite High compared to others but I
thought it said only two sample of two
and it does it would seem to be more
pervasive uh so I think that point could
probably be uh even stronger made
thanks
francisa um I I like that paper very
much it has all the things I would have
expected in there so I guess most of the
your arguments are about the size of the
shocks they were just hit by fewer
shocks luck because they rise policies
because they had less fiscal monetary
stimulus and I guess the thing you
didn’t mention I would add another one
that’s just shock there parts of the
region are very close to trade fairly
closed so you wouldn’t get these Global
shocks to them but the other bit is that
perhaps any shock of Any Given size has
less impact on inflation in at least
parts of Asia simply because they have
such large informal economies so that
was my one question did you did you look
at the impact of these shocks and
perhaps you would see that in your last
regression where you look at the
correlation with initial regression
initial conditions initial inflation
did you interact that with the Asia
dami and then the second comment is
perhaps different measures of output
gaps would also be useful to use because
I noticed here in 2019 already the
output Gap in Asia was almost 10% of GDP
that seems a lot maybe the trend before
the pandemic was just too strong thank
you let me add a quick question on my
end too um first on the core versus
headline um I thought that the subsidies
point that uh Antonio made go went in
the in that direction so that the
subsidies can be one reason why the
headline shock was that he shows uh was
smaller um but I I wondered I think
there is already some work on this in
the paper but it will be interesting to
see the extent to which which you have a
smaller shock
because of say rice versus wheat uh also
gas prices are different in different
parts of the world so I thought it would
be interesting to see the extent to
which you have a difference in world
market price shocks in different regions
versus the actual energy and food price
shocks in the countries which will
reflect the world price plus the
subsidies thank you but I think know
great paper very interesting discussion
and look forward to hearing uh What uh
Antonio can tell us
in a concise
way I mean thank you for many of the
comments and these are all things that I
think uh I should explore in some cases
subject to whatever data I can find uh
as always but uh a couple of answers to
questions um I mean the administer price
I struggled with that because I’m not
sure how to handle that I mean Asia
probably has more administered price
that’s my guess I will have to find a
good number to back that up but that was
also true in 2009 when inflation was
quite high in Asia so it it cannot be
that our Minister price explains always
lower inflation now those numbers that I
saw unconventional fiscal policy during
the pandemic in theory they should Capt
of that in theory because in theory is
the subsidy to energy and food prices
again in practice I’m not sure but in
theory maybe they capture that but it
has to be a little bit more than
administered prices otherwise in
previous years or episodes you wouldn’t
see that difference but again I’m not
sure I have more to say but I’ll try to
see if I can quantify that in some way I
did look at the exchange rate passed
through by region whether it was very
different and in my analysis it didn’t
look too different I know in the
literature the there’s some differences
so I try that to see doesn’t matter if I
do it by region but may I should look at
it again and see if there’s anything
looking at different inflation Target I
think is interesting I didn’t look at it
per se I look at previous inflation I
should look at that Phil was asking this
question about high income countries I
was only looking at Emerging Markets so
I was ignoring Singapore or Hong Kong or
Korea um again some of those countries
do they look like the merging markets
there was not a lot of inflation others
suffer a little bit more but I don’t
have a good answer because I was only
looking at the Emerging Market but um
now Steve comment about supply chain
disruptions yeah I’m not sure how to
quantify that I’m not sure how to make
sense out of that unless you really
think that the goods stay stuck in Asia
and they needed to be sold there but I
don’t know how to possibly I mean I
think if there’s any way to quantify
that one the intervention on Exchange
rat I think it’s part of what you see
there um so it’s not just the cred of
the central bank but again how do you
separate the two because if you’re
committed to a stable exchange rates I
could call that credibility in some way
second that’s how do you think about a
stable nominal exchange just pure
monetary policy or is manipulation I
think it’s a combination of both
depending on who you ask um um the
question of that these countries are
closer to trade again I need to think
about how to quantify that in any way I
need to think about the informal economy
uh I’m not sure how different is in Asia
from some of the other Emerging Markets
I’m looking at so I think it’s going to
be a relative comparison to to some um
uh and yes the point you made J Maria
about maybe the shocks to some of these
sort of energy and food prices are
different because of the particular
issues again I I know they were in rise
for sure in food prices but maybe
there’s a way to put a number to that
that I’ll try to do yeah thank
you thanks a lot uh Antonio thanks a lot
PRI and to thanks to everybody for the
contribution to the discussion let’s
move to the second paper and it’s refet
gak that is going to present it and it
deals with emerging
Europe and refet is a professor at Bill
Kent thank you um it’s a pleasure to be
here thank you for asking me to work on
this although being from emerging Europe
uh emerging Europe was not something
that I ever thought about so it was a
good opportunity and it was a good
opportunity to think about emerging
markets in general the human mind wants
categories and um one that is
very prevalent in our field is emerging
markets and as we’re thinking about what
is
it how is it that the Emerging Markets
are different from advanced
economies that’s not very obvious
actually right I mean there there are
two ways of thinking of this one is the
IM World Bank uh way of thinking of it
which is just by income levels right and
that I
understand but in terms of the academic
literature that isn’t what we have in
mind right you know implicitly it’s this
we have these models and ways of
thinking that are appropriate for
advanced economies but they don’t quite
apply to Emerging Markets because they
are different right um without quite
explicitly saying how they are different
different in a bad way way certain
that’s weird
um and I think that was kind of not
entirely incorrect in the 1980s 90s
right I used to think then that you know
these are the economies that know
bizarrely do procyclical fiscal policy
that’s what differentiates them right um
um maybe a better way I was thinking of
this over the weekend is to say you know
normal economies ad domest economies
have business Cycles Emerging Markets
have boomas Cycles right they have
crisis and it’s that those are
fundamentally different things but that
metrics since the global financial
crisis or so um it’s the forly advanced
economies that are very emerging like
and emerging economies have essentially
emerged so so it’s really worth thinking
about do we need a separate way of
thinking about you know emerging markets
do we need to ask separately you know if
this is what happened in advanced
economies and postco inflation what was
going on in Emerging
Markets implicitly assuming that it
would be something else right um so most
of my talk is going to be saying at
least in the country that I’m looking at
it really isn’t okay so whatever helps
you understand Advanced Europe inflation
in postco Period the exactly same things
help you understand emerging Europe okay
it’s just Europe so um it really is
important to remember that we need not
think of Emerging Markets as a separate
species of countries that require a
separate set of tools to understand okay
um the toolkit really works well and
when you apply that toolkit it turns out
that it’s the same answer okay you know
um the European inflation of course is
kind of different in that I’m going to
keep saying energy here but really that
energy and you know just because it’s
easy I’m going to show oil prices and
things of that sort but really what
matters is gas right uh and in
particular dependence on Russian gas and
that was the case for advanced Europe
and emerging Europe and that was it now
it’s kind of cheap to say that and it
was important that somebody actually
looked at this and said you know does it
really work when I did it does really
work okay um
except um one of the Glorious um
emerging European countries is truly
different um and um in in the paper I
spent some time talking about the
Turkish case recently I wrote separately
on the Turkish case I’m not going to
spend too much time here but looking at
the Turkish case is what really puts
that you know final nail in the coffin
and says Okay um there are two broad
possibilities here when you see all
these countries simultaneously have this
you know inflation boom one is they were
doing some coordinated stupid policy
okay it really was policy coordination
on bad policy or it was a it was an
external shock okay the external shock
story works well but you know if you
recall your undergrad statistics this
really is um you’re unable to reject a
null the story is consistent with the
external shock but you don’t know what
it would look like under the bad policy
and then you look at Turkey you learn
what it looks like under bad policy
right um and it’s very different um and
it’s offensive when you love yeah um
okay
so inflation you’ve seen this a zillion
times um over the past two years or so
right three years um it zooms up comes
back down now what is interesting here
is the
scale that this is inflation that peaks
in 2022 at three and a half%
and you know when you look at that one
you go ha I’m going to say none of you
lived in a country that looked like that
okay so that was
Switzerland and it’s not emerging Europe
but it certainly is Europe and a
fascinating question is how come the
Swiss inflation was so much lower than
the EUR area inflation right because I
mean Switzerland is this very small
island smack in the middle of a sea of
Euro area right and one would have
thought I would have thought um they
would look very similar they really
don’t okay um what is the big
difference the big difference is two
things um which both boil down to energy
one is Switzerland is much richer than
the rest of Europe the average Euro area
which mechanically lowers the weight of
energy in the consumption basket the
other one is Swiss energy is publicly
produced and price controlled and
therefore the shock was much smaller and
the weight much was much smaller and
there you have it okay so then the
question becomes if that works so well
to explain the Swiss case obviously
reductionist um does it work elsewhere
in Europe too so we’re going to look at
emerging Europe okay emerging Europe um
you don’t have turkey in this table it
it has floating exchange rates of sorts
um but emerging Europe is a weird Hodge
PGE of
countries most of which are essentially
following the ECB in monetary policy
very closely okay so here you have kosov
and Montenegro which I to my shame
learned uh because I was working on this
that have unilaterally euroz okay it’s
not even you know fixed exchange rates
whatever Bulgaria has uh to my knowledge
one of the very few successful currency
boards right that would make Steve hanky
proud
um and then but the larger ones of
course are um you know Poland Hungary
and Romania right so what I’m going to
do is I’m going to define a Emerging
Market emerging Europe weighted average
I’m going to exclude turkey because a if
I did include it it would be Far and
Away the largest weight in there um and
it was glorious 123% and cumulative
inflation over this two years we just be
looking at Turkey okay so I’m going to
look at the non-t turkey emerging Europe
um and then talk about turkey separately
yeah very good okay now the point here
is it’s not just that there is this
average but a great majority of those
countries are very close to that average
okay you actually have two outliers one
is Albania that has has surprisingly low
inflation what is Hungary that has
surprisingly High inflation but the rest
are really close to that average okay so
it’s really isn’t that oh you know
Poland get a high weight so they you
know looking at no no they look very
much alike and this is exactly what
makes me
say something common to these countries
must have happened right you know either
they fig their way of screwing policy up
simultaneously or something external to
them happened to them
yeah it’s important to look at core and
um core looks kind of similar too it’s
not surprising that there is more
variance in core right um but you see
more or less the same story in core
okay now
the I like doing um factor analysis so
if you try to extract factors from these
countries headline and core inflations
um it turns out one factor does
perfectly well in headline that fact
factor is essentially everything and it
loads exactly evenly on all of these
countries that says you know the
headline inflation was moving in exactly
the same ways in these countries so if
you just take an average of them you’re
doing perfectly fine okay with core it
looks very similar not exactly the same
kosov is somewhat different um and I
don’t have deep insight into the kosov
core inflation um but that’s the one
that’s creating the difference there
nonetheless you explain depend depending
on which subsample you choose something
like you know 2/3 to four fths of the
variance in core with one factor that
looks like a proper average okay cool
very good so what we see is inflation
picked up in all of these countries at
the same time and inflation peaked in
all of these countries about the same
time too right so you have to say you
know if it’s policy it has to be a
policy error that is very coordinated
okay um and in some cases in some places
of the world once you say you know it
has to be a common policy header across
a whole bunch of 11 countries here 11
countries coordinating on bad policy
surely it didn’t happen here it may have
happened because these are all countes
that follow the ECB so if ECB screwed up
they will all you know follow up okay um
but but that wasn’t the
case or a common external shock okay um
the common external shock is going to
fly so let’s see
that so the first thing we’re looking at
is oil prices we prices right those are
leading and then the headline and
core this really isn’t econometrics but
you know it kind of works right um it’s
it’s weird in that um this is levels
versus changes right it’s the level of
oil and food prices versus the inflation
rate that’s the change but that’s the
way it usually works
okay now I’m going to show you a whole
bunch of things of this sort um my
interest is in trying to understand the
intra emerging European dispersion of
inflation and trying to relate that to
what was happening to the energy
contribution in these countries so the
first thing you look at is the weight of
energy in the consumption
basket and then U try to relate that to
the cumulative inflation okay so the sum
of the two years inflation during the
inflation runup from the beginning of
2021 to the end of 2022
right that works rather well and the
somewhat surprising thing here is that
at the Left End you have Switzerland
where one would say yeah okay as you get
richer the weight of energy in your
consumption basket goes down so that’s
kind of fine and then the next one is
Albania yeah which is not known for
being a very high income country so
we’ll have to come back to that but
overall it’s kind of right um but the
other you know glaring exception there
is Hungary which has much higher
inflation than what it should compared
to you know what its uh weight of
inflation the consumption basket is
right okay now this is more interesting
um this was this was headline inflation
so headline mechanically this this has
to work okay this is
core and and here there’s no reason why
this actually works okay because this is
still the weight of energy in the
consumption basket versus core inflation
okay so that’s something that gives you
a pause for a second and makes you think
you know what the hell um and there are
ways that that relationship might be
there so one is the wage pressure that
is you know headline inflation goes up
and then people begin to ask for higher
wages and then that fees them to core
okay but that’s not only one okay um
because remember that
the weights in the consumption basket
are expenditure weights so countries in
which energy is more expensive are going
to have it’s not only that incomes is
lower or total expenditures less but if
energy is more expensive you’re going to
end up again mechanically with a higher
weight okay and those countries may end
up one can imagine that that has direct
production effects too okay so that’s
something actually um testable and there
are two ways you can look at this one is
if it’s the wage pressure even before
energy you would expect to see this
through the food effect right you know
my life has gotten more expensive I’m
asking for more Wages that’s going to
show up through the share of food in the
consumption basket before it shows up
through the share of um energy
and I’m not going to show you that but
that relationship isn’t there in fact if
anything it’s a downward sloping
relationship okay on the other hand um
you can think of the energy shock as a
shock to the headline inflation through
the weight of energy in the consumption
basket but obviously it’s also as a
supply shock okay and we have metrics to
quantify how bad of a supply shock this
is for different
countries through their energy
intensities so one almost analogous way
of looking at this is you know did the
countries that have more energy
intensive production structures suffer
worse okay so let’s look at
that yeah so that relationship isn’t
quite there and um but it really should
be
somehow energy intensity the the doesn’t
work because of exactly what was talked
about in the discussion um after
Antonio’s paper which is energy
intensity energy intensity is not an
expenditure share this isn’t energy
intensity is not measured as you know
the value of energy used in production
divided by GDP it’s actually a weird
measure which is um the physical
quantity of energy used megga divided by
GDP
okay but even even more
importantly I hate to say this as an
economist but this is a very clear case
where cost and opportunity cost aren’t
the same thing okay countries that
import
energy they are beholden to the world
energy price and you know they’re
powerless countries that produce their
own
energy when the world energy price goes
up keeping energy sheep in the country
creates an opportunity cost and many
times they don’t care okay so they can
actually keep local energy cheap enough
if they don’t have to import it so it
becomes really obvious that it’s not
just the energy intensity of production
but how much of that energy has to be
imported okay so um I didn’t see in the
literature a term for this I call this
energy sensitivity which is the energy
intensity times the share of imported
energy
okay and that relationship really
works so what you have here is Albania
is way down there because I’m going to
come back to this um I can say it now
Alban is an energy producer this I
didn’t know um Albania has about 0.1% of
the world reserves of oil some gas too
okay um that’s tiny then again so is
Albania so it works very well okay
but the point here is that um this
distinction between well okay um and
that was very nicely made in the
discussion right there are there is the
core and there are the headline shocks
but in this case a lot of those shocks
to the headline were also shocks to the
core right so it it is the shocks that’s
driving this whole
business all
right and this is it um no this is not
it sorry this so this is something
similar um as a memo item for the Euro
area if you look at the energy weight in
the consumption basket versus the
cumulative inflation rates in the Euro
area countries that also works very well
okay and and this is my point right you
know nobody is surprised to see this and
you shouldn’t be surprised to see the
same thing working out in the emerging
European countries either because it’s
just Europe these countries are very
similar okay up to their monetary
policies in most cases actually
all right
um yeah so if I try to relate the
cumulative energy price increase to the
cumulative core inflation that also
works very well okay and you know here’s
the de composition of the core versus
non-core right um because of the weights
food obviously has a much higher weight
than energy and therefore mechanically
explains more but it’s really worth
remember remembering that you know
except in cases of you know Thro crop
failure Aven flu whatever um what we see
as food inflation is often driven by
energy inflation okay um there’s a nice
IMF paper that makes this point and it
was surprising to me that more people
hadn’t worked on
this but the key here is to see that the
commodity price change is at least a
half in many cases at least twoth thirds
or more
of total inflation that we observe in
these countries Okay cool so I can turn
that into a statistical analysis and run
a regression of headline and core
inflations on the contributions of
energy and food okay this is only for
2021 to 2022 it works gloriously well
and you know having looked at the
relationship that I showed you you’re
not going to be surprised that it works
gloriously well okay um but the point
here is that the food and energy
contributions explain essentially all of
the headline right and at least half of
the core
inflation okay so very good
um then again you know if you were
looking at this and not thinking what
kind of a crapp regression is that you
haven’t been paying attention um because
essentially this is a weighted average
regressed on its components better works
okay um in the case of core too right
you know if inflation is this
broad-based increase in prices you know
I’m going to regress changes in some
prices some average right on some
individual
ones maybe it always works
okay but one of the things before I come
back to this maybe it always works
is I’m a bit troubled by my ability to
explain all of the dispersion and
inflation and in fact all of the
inflation itself in these economies by
looking at the Comm price shock because
the literature keeps pushing this supply
chain you know disruptions business
and you know there is no residual here
okay that commodity price shock actually
explains it all this may be a European
thing although the ecb’s own analysis
for the Euro area inflation puts a lot
of weight on the supply chain
disruptions too okay so that’s something
we’re thinking about out by somebody
else I hope okay now but the econometric
issue remains you know maybe this is
something that you have to find okay and
a cheap test is to do this for some
other time okay so this is the same
analysis for
201819 it doesn’t work that way all the
time in fact this just doesn’t work for
core at all okay and for the headline
you end up explaining much less of the
variance so it really was a special time
in 20
2122 where the quantive price shocks to
energy and food properly explains all of
the dispersion of variants in emerging
Europe okay very good so there we have
it this is the
story now a minute on Albania and
Hungary why is Albania you know so
different there are two reasons reason
one is being an energy producer okay
well 20 he um reason heal is Albania
subsidizes energy to poorer households
and about all households in Albania are
poor okay so that’s a very controlled
price with an artificially low weight
okay um but also the Albanian Le was
appreciating in this period and it
didn’t begin to appreciate postco it had
been appreciating for some time again
Alban is Tiny so small external stuff
carries over to a large extent in
particular here they were getting
FDI and that FDI was more than enough to
offset their current account deficit
which was appreciating the currency that
appreciation carried at the same rate
there’s a chart in the paper if
anybody’s interested okay so it really
isn’t this you know kind of reverse
causality story that what was happening
to the elect kept continuing happening
in this period too but an appreciated
currency is a very good hedge against
the external shock and that really
worked well this is exactly the same
story for Switzerland right so
Switzerland there’s more causality but
it’s it doesn’t correlate with the
energy shock you know when things get
iffy the Swiss frank appreciates that
strongly happened in general the Swiss
National Bank fights 21 nil to stop that
in this case they were very happy to let
the Frank appreciate and then when the
Frank stopped appreciating they were
like you know we’d like to see more of
this so they intervened to make it
appreciate
okay um and in this sense almost the two
ends of the European income distribution
Switzerland and Albania were very
similar in having low weights of energy
in their consumption baskets being
independent in energy pricing
Switzerland produces is an immense
amount of electricity inside the country
by themselves so they can do this right
and having appreciating currencies what
about Hungary Hungary you have to resort
to policy okay Hungary had an election
they had a very ill advised economically
well advised politically um fiscal
expansion that kind of looked like the
US case right you know on top of an
economy that was kind of chugging
chugging along
they dumped a huge amount of fiscal
expansion led the foreign to depreciate
like crazy and that pass through
combined with the demand stimulus LED
Hungary to have a huge inflation hence
macro policy isn’t Al together
Irrelevant this hopefully nobody is
surprised about right you know you do
good policy good things happen you do
bad policy bad things happen the point
about emerging Europe is these countries
have very very similar policy mixes
because they’re following the ECB so
closely in general Hungary was one that
didn’t have to do this they had their
own currency floating exchange rates
they could do fiscal policy they could
do monetary policy right chose to do the
bad ones saw bad effects
okay let’s look at Turkey all right so
yeah that’s
different and the fact that that’s
different is really important okay you
know Turkey doesn’t have following every
other country yeah you know nothing
nothing nothing and then down no right
you know um we had
inflation that freaked out the rest of
the world now okay you know if you
remember hungar Hungarian inflation was
much higher than everybody else and it
like really stood out that’s 2018 in
turkey that’s the same order of
magnitude okay that’s the Small Bump
that you’re looking
that and if you look at the postco
period there you know inflation takes
off like crazy kind of comes back down
and then goes back up again okay those
are all very obviously relatable to
monetary policy
choices there are a couple of pages in
the paper about this um I’m not going to
take too much of your time here but it
really is truly deeply fascinating you
know if you if if you are actually
interested
in monetary policy analysis turkey is
painful to live in but just glorious to
analyze okay um and I’ve been doing some
of that recently so um let me plug for
my own paper um you know we wrot my
colleagues and I wrote this paper
analyzing the Turkish inflation and the
bizarre stuff going on through the lens
of a new Kian model and said you can do
this exactly okay the Newan model you
know we think of as well suited to
analyze normal policy it actually has
implications for abnormal policy too and
turkey shows that those implic are born
in the data okay
um
it’s it really was the proper way of
thinking about this is that the country
tried to do NE officiary and
disinflation even before the ter was
coined so we tried to keep interest
rates low to lower inflation because the
prime minister at the time the president
now thought that was what the causality
is right um and this goes back to 2010
we can date
it what happened s is the Central Bank
begins to build in this inflationary
pressure especially early on the
technocratic expertise in the central
bank was very high and the policy makers
were actually good economists you know
not policy makers with much backbone so
they did actually keep interest rates
low but they did understand what the
country needed and what they were doing
was wrong so they found all these ways
of trying to offset their own policy
through the back door and that led to a
package of truly fascinating policies
like you know we’re going to keep the
interest rate low but we’re going to
make the effective rate the interbank
rate trade in a very wide Corridor and
we’re going to commit to having the
variance be very high in that Corridor
okay so we’re going to go for the second
moment to offset the first moment very
long list of really interesting stuff on
you know things like okay so we’re going
to lower the interest rate and the
Corridor is going to be narrow too
because the government is on to us but
then this was a scarcity based system
we’re not going to lend you and the
banks were like we’re all going to fail
this a scared system right and said well
you’ll have to go to the discount window
so they began to use the discount window
as a policy tool right all of these
things are really interesting in trying
to understand how countries may try to
substitute essentially fiscal Wizardry
in the place of decent monetary policy
it doesn’t work work okay um and by 2021
after changing five central banks
governors in two years the president
found someone who would just do what he
wanted them to do so you know with the
target was 5% inflation was 18 at the
time the Central Bank began to cut
interest rates you ended up with the
boom that you saw okay
now that’s really fascinating but these
are the kinds of things that constitute
a colossal enough policy failure that
generates inflation that is multiples of
your target okay not the kind of
policies that we see in the normal um
emerging Europe all right very good so
I’m going to end with this that says
look Switzerland Euro area emerging
Europe okay if you’re okay understanding
Switzerland versus Euro area you have no
problems understanding what was
happening in emerging Europe one
continuing question and I’ll I hadn’t
thought of this actually and working on
this triggered me so over the next few
years I think I will work on
this the emerging Europe always has
higher inflation than the Euro area it’s
not very obvious
why you know is it just price level
convergence is it something else that’s
an interesting question but conditional
on that there is nothing interesting in
the emerging European inflation it’s
just the same as elsewhere in Europe
right so so there you go you know um you
don’t need to differentiate emerging
Europe from Europe it’s just one Europe
right um although um turkey is an
exception and that’s the exception that
proves the rule it tells you that you
know if you’re creating inflation by bad
policy it doesn’t look like what
happened in emerging
Europe inflation shock is the big and
clearly identified driver of inflation
in these emerging European countries as
it is in Ur area countries okay the
levels are different and that’s a good
open question that hopefully some other
people in this room will pick up on as
well um and that’s all I have to say
thank you very
much thank you raet and give the floor
to Isabel vanin kist from the European
Central Bank to discuss the paper thank
you
so um thank you very much for having me
here and thank you for asking me to
discuss a paper of refet I’ve never been
a d cuss in office but uh I know him for
many many years so it was a great
pleasure to read a paper and to be asked
to formally discuss it as well um the
disclaimer uh applies also in my case I
work for ECB but these are um My Views
that I’m going to present here so I’m
just going to spend one slide on
summarizing the paper I’m going to go
very quickly over this because raet was
very clear and the conclusions of of the
paper also um very clear so his finding
is emerging European countries are not
so different from from Euro area
countries this postco inflation surge if
you look over the 2021 2022 period was
driven by external shocks and in
particular the rise in energy and and
food prices although food was to some
extent also driven by these Rising
Energy prices and these CrossCountry
differences were uh that we see within
the region let’s say were driven by the
weight of energy in the consumption
baskets and then this combination of the
energy intensity of production and the
share of imported energy what he calls
in their one denom or the the energy
sensitivity and then one last point I
wanted to pick up in the in the kind of
main findings is also that the pass
through it seems at least from the
results to uh core inflation of these
shocks was was higher during this period
than before the
pandemic just here a chart I I I pinched
this from an IMF paper but I thought it
was was nice to see um how inflation
really developed um between 19 2019 and
2022 in Europe and I I think you can see
two things there first is the point that
Ted was already making that before um
the shock hit basically inflation in in
emerging Europe was to some extent a bit
higher um than in the rest of Europe and
turkey was already starting to move off
the charts and then you move to 2022 and
you you see that really the closer you
are to Russia I mean the higher your
inflation was right so and and Turkey um
nicely is within the group here because
we didn’t have a separate category which
was Deep Purple of the charts um
basically by then um but in the rest of
my presentation I will leave the turkey
question aside because I think ref knows
much much more about this than I do and
I think it’s really like um you know um
a case where you say textbook economics
actually still work so in that sense
it’s indeed interesting to study um but
it’s also very sad um to see the
developments for the country
itself um so in my discussion I mean
what I would say first I mean I think
you know just this this uh conference as
a whole and and the question that disas
here is actually an interesting one
right because um a surgeon inflation is
very bad for the cost of living it’s
really um you know bad for for welfare
but um you know once you see variation
in the data you can try to understand
what is actually driving the inflation
from formation process and what are the
best policy responses and best
Frameworks that one has to potentially
deal with that and so in that sense
looking at this uh episode is is very
helpful to for us to understand better
um what drives inflation
I mean the paper is very nice it has
very straightforward results and I find
it very hard to disagree with anything
that that reford has written in that um
it’s simple but clear and clean um so
basically it’s really for those who want
to understand what’s going on in
emerging Europe um really worth to read
um I’m going to ask a question though is
it is it the full story right and um an
implicit question that is also behind
her is a bit like was there a role for
policy makers maybe to lower the impact
of the shock like what what what can
policy makers learn from that because
are they just just hit by external
shocks and that it they should just
accept that then inflation goes up and
it passes through to core inflation more
powerfully so the first question is is
there a role for for other factors right
so I mean there cannot be a doubt that
commodity price shock led to inflation
in in Europe anyway right so I’m just
showing here this chart I mean we
mentioned already a few times before um
commodity prices went up strongly um in
particular after the the breakout of the
war and of course in Europe but really
stands out is is is this natural gas
price so these are commodity prices in
real terms right but I thought it was
sometimes better to compare than the
nominal terms where it always all just U
blows up even compared to the 70s right
but you can see where Europe already
would stand out the natural gas price
was just you know skyrocketing we’ve
never seen such an increase before so
you would expect that this has an impact
on inflation basically right now the
question is a bit were there other
factors on this play and and as reford
already mentioned um in the Euro area we
you know we made quite of a story also
about Supply bottlenecks pent up demand
coming from the pandemic I think in the
US there’s also the story about
interaction of physical Andy policy I
mean there were there were other factors
that were at play that were at least
seen at play as like in a counterfactual
where you wouldn’t have seen this
commodity price stock we would have seen
some inflation as well right um so in
this paper that’s not really coming to
the FL and one thing where I thought is
also relevant factor that if you look at
the oil price for instance the oil price
started to increase already before the
war broke out right I mean and that was
basically just you know the the kind of
recovery from the pandemic which also
coincided with the supply bottle and
expend of demand so you may be just
wiping up all these factors under this
commodity price increase overall and so
in that sense you know you may be
picking up something but at least for
for the 2021 period you may not be fully
picking up that is just this energy
price increase but there were other
factors at play right um so there are
some papers that look at that I think
you also quote them in the paper for
instance from from Ben banki and Olivia
bosar we try to have a more
comprehensive framework to to analyze
these factors and I thought maybe that
could be one way to see whether really
it’s only the energy prices or are there
um other factors at play like is
emerging Europe in that sense different
from the eura area um for instance that
you know it’s really only the energy
price factors that that that play a
role um a second question I was uh
wondering is uh why was the impact of
the shock larger and this is a question
um that you can also ask in your area
actually because if you look there as
well you see the pass through to core
inflation is much stronger than than
we’ve seen in the past so ref at Look
200 2018 2019 but you know if you look
for your area and I’m sure you’ll find
the same for emerging Europe if you even
go further back in time this is like
really a much stronger pass through than
we would normally historically have seen
and that also explains if you look at
forecast that you know forecast on core
inflation got it more or less
systematically wrong I think across
institutions basically is particular for
Europe right and so the question is why
I mean and and and here I think even for
the Euro area the jury is still a bit
out there because we have a few theories
but I thought I throw them here because
I think it’s really something for for
further research because understanding
how inflation uh moves in particular
when inflation goes up so quickly and so
strongly um is helpful and the first one
is a bit of a non-standard one but um I
don’t know if many of you know the paper
by Danielle canaman and um co-authors on
the fairness on price increases right I
mean and he gives the example if you
have a snowstorm right and uh people all
start buying shovels you don’t see um
prices increasing for shovels you see
basically that they’re just running out
of them at some point because it’s seen
as highly unfair that people on top of
having to deal with you know this
snowstorm they have to pay more for
their shovel right so companies don’t
thereare to do that I mean if you look
at the at in particular when the war
broke out you can kind of see the
opposite effect right you can think that
actually across the media it was in the
war broke out Energy prices are going up
companies are suffering so much and it
was perceived potentially as fair that
companies passed part of this on to
consumers or at least more than they
would normally have done so they
accommodate less so that that’s um
that’s um one one one factor I think
that may be very specific to this
episode because it was so widely
documented I mean it’s not easy to
analyze but I think it’s really an
interesting case study where you could
say uh does does this kind of theory
applies a second one and this is um I’m
I’m going to do like the previous
discussion quote a bit of my own work
here um is the the question of of
nonlinearities right so um we uh did
some work where we looked at the pass
through from wages um to um uh headline
inflation basically um and we look
basically at um episodes when inflation
was uh lower in a lower inflation period
versus a higher inflation period and we
tend to find in research that um the
pass through is much higher when you’re
basically in this kind of higher
inflation environment generally right
and we have uh you can think of a number
of explanations um for that in
particular when inflation V variability
is higher it’s easier for companies to
pass through um shocks because it’s more
difficult for consumers to to to to
notice that I mean I always use the
example of of Japan where you know maybe
a bar of chocolate cost 100 yen for 10
years if a company uh increases the
price it’s very noticeable so consumers
may switch to uh um basically another uh
produce or another producer basically
whereas if there’s a lot of variability
it kind of goes under and so everybody
can increase their prices further I mean
when we did for the Euro area this
analysis looking not at just wages
because we had this big shock in in
input cost we we we just replicated our
analysis for this shock on input cost we
found indeed that this this phenomenon
also applies so so this may be a reason
why um you have a large impact of the
shock in the same paper we also looked
at another factor which is the type of
shock you have and I think Reit also
hinted at that it was a supply shock and
we tend to find that actually pass
through is higher um when when you have
a supply shock so that the the pass from
input costs to uh final um prices is
basically sh sharper when you have a
supply than an amount shock so it could
be that the same factors are at work for
in merg in Europe I I wanted to actually
during the weekend just to run
regressions with uh um um for with the
same with the data that trevet has been
using for his paper unfortunately my
data extraction tool from the ECB was
failing and it was not available on the
weekend so but I’m happy to share the
code so that you know you you could try
that and use that as an extension in the
paper but my SU I is that the results um
would would look broadly
similar and then a third question that I
had was um what explains the
CrossCountry differences so it’s true
you know first if you put turkey in the
chart it looks like there’s nobody
else’s you know they’re all looking very
close to each other if you take Turkey
already off the chart and there there is
some CrossCountry variation and raet was
mentioning already a few factors but I
was thinking it could be um helpful in
particular because you know you didn’t
really systematically analyze them right
like uh are there factors important such
as the role of Central Bank Independence
um I mean across these countries in the
region there’s quite some difference
like does it make a difference or
doesn’t it matter so much because most
of them anyway tight themselves to the
ECB and this is while they may be
perceived as not being fully independent
in their laws it doesn’t matter so much
the second question is the type of
fiscal support measures I think the
paper on on emerging Asia uh came into
that and I can imagine that in these
region there were also quite a bit of
fiscal support measures so you know or
did countries all end up going for the
same kind of measures and then the final
question is something that refet hinted
at um towards the end of his
presentation is does it matter that you
had a history of higher versus low
inflation like why is inflation in
emerging Europe higher I mean is there
just underlying factors or is it just
like a history dependence that that
starts mattering there but I thought it
could be interesting to go a bit more
systematic in terms of analyzing this
this um these CrossCountry variations
and particularly the case of Hungary
where as you mentioned also the the
macro policy
um are not always labeled as the
textbook
ideals and then finally I know this was
not a part of the study but I thought a
look ahead what happened after
2022 um I think the decline uh um after
inflation peaked is actually as
interesting maybe as the studying the
search itself if not even more but you
know it’s still developing so it’s too
early maybe still to say um but it can
shed a light on some of the other
questions right so the policy response
for instance mon policy so eff it kind
of I was very happy to read that it was
not the e that was at fault for the
inflation um but um you know you can
still you know given the lacks of
monetary policy you would also not
expect that after such a shock occurs
that you would see whether the policy
response is adequate um in the first two
years of the shock but you would expect
to see it a bit further down the line so
was a policy response adequate also on
the fiscal side right you had often
price based but also um income based
measures so um did that matter and what
does it mean and basically for the
return of inflation um another question
is about Labor product Mar rigidities
right so of course you know there is a
very quick up and down but you know you
can kind of you even in the forecast you
expect that the tail Fades out much
slower at um towards uh in the downward
because of rigidity so can we really see
that and and is that very present and
another one I think which is important
and um triggered at least some
discussion in Europe as well is the
importance of Market power right um and
so I also did some research in that
regard that shows that you know there is
um normally inflation variability is
actually lower when you have uh sectors
where some companies are more
concentrated presence because normally
they price already more to Perfection so
you know you’re already adjusted
basically to what the consumer is
willing to pay um but especially in the
food industry for instance there were a
lot of discussions in Europe at some
point that you know companies were uh
abusing let’s say their Market power and
um kept P prices High because of that
and I think it you know that that kind
of development given the variability
we’ve seen in inflation and in the data
could also help to understand that
especially also across sectors so I say
in some an interesting paper and I think
it’s really a door opener to conduct
further analysis and research but not
just because of this paper I think this
episode just welcomes a lot of questions
and and can help uh to us to understand
better what what drives basically
inflation in particular when we see such
large
shocks thank you very much thank you
Isabel and let me open the floor
uh actually sorry I should uh uh yeah
open the floor let me give at least a
minute to refet
first let me thank you um very much
that’s a very good discussion I think
all points are well taken um very
quickly um you know was there role for
policy I think this is not a easy
question to answer for these countries
in the sense that so many of them are
you know have euroz or have currency
boards or you know hard um exchanged
fixes that if the question is monetary
policy they don’t have monetary policy
so we’re really looking at you know you
U
um you know can we look can we do a
broader
decomposition if you want to think of
emerging Europe as effectively you know
Poland and Hungary those things may be
done for most of the other countries you
just don’t have the data okay you know
there is no you know slack data or
supply chain anything for bosina or
Montenegro so um it’s not easy to do the
full decomposition and then say yes you
know look Energy prices that’s why I was
looking at the energy pric and saying
know this seems to explain it all having
said that um your point about you know
perhaps these Energy prices are proxying
for other things that’s kind of unlikely
because is the weight of energy in in
the consumption basket that should not
be aoxy for a lot of other things other
than essentially income um but your last
point I think is really important two
points are really important one is you
know why was past through higher uh this
time around right I think all of your um
suggested uh reasons are very reasonable
another one is you know given the war
this was seen as a more persistent um
energy price increase and therefore much
easier to um you know react to in
increasing prices they didn’t have to
you know say let’s wait a little bit and
see whether uh the prices come back down
or not okay um but your last point of
what else explains these differences you
know Central Bank Independence fiscal
support history of inflation history of
inflation is a copout answer because
that then goes back to well why was the
inflation higher earlier right um
Central Bank
Independence somebody should work on
this right you know EUR area Montenegro
and C these are all Euro they don’t have
the same inflation rates they didn’t
have the same reaction why it cannot be
Central Bank Independence okay um fiscal
support I tried to relate things to this
failed because not easy in particular I
wanted to say you know perhaps the
countries that had more fiscal space had
lower inflation because they could do
more subsidies okay but measuring fiscal
space is difficult uh and you can’t just
do you know let’s look at that to GDP
right um 40% debt to GDP is nothing for
some countries it’s a ceiling for some
other countries a good way of doing this
is to look at long-term bond yields at
how the market prices you many of these
countries don’t have trading bonds so it
really is a data limitation
that says great question I actually
don’t know empirically how to go about
answering this thank
you thanks raet let me start with
a thank you so much um rafet and the
discussion I think it was a very you
know very rich paper and I think a very
rich discussion also um I was really
struck by one of the charts which you
showed which was um Energy prices and
core and then you talked a little bit
about um you know um you know how what
what could be the different mechanisms
and you talked about wages as well um I
think this so I think this is one of the
key things you know pass through from
Headline inflation shocks into core is
really one distinctive feature of this
crisis and um I thought you know maybe I
missed it because you know I haven’t
read the paper if you could tease that
out a little bit more um in terms of
what the mechanism is and you know wages
are the standard mechanism but you could
you know I or if you you think about an
empirical framework where you could test
for some of some of the mechanisms other
than wages you can think think about a w
you can think about core inflation on
the left hand side wages on the right
hand side and some of other factors or
quantify you know what of what portion
of the pass through was through
mechanisms other than wages and here I
think the nonlinearities I think which
the discussion pointed out also becomes
more you know more Salient because you
know demand for example if you look at
wages also if Energy prices change or if
costs of living change the demand for
higher wages are high you know these are
more Salient for large shocks so I think
um you know if you could incorporate
both mechanisms other than wages and at
least for wages I think some of the
nonlinearities I think that could be
interesting thank
you proceed in this direction
Antonio just a couple of small comments
uh mean I think this pass through is an
is a very interesting question why is it
stronger this time um again I don’t know
how much of the energy shock was
different from previous energy shocks
does it matter that gas versus oil does
it feed stronger into the cost of
companies you I’m not sure what the
answer is but maybe that explains some
of what we see there now the other
things that I mean it’s true that to
some extent all these central banks
follow the European Central Bank and you
say there’s no monetary policy but even
within the Euro area in particular in
the early years you clearly had very
different inflation Dynamics some of
those seem to be correlated with sort of
inflation dynamic before the euro was
launched so again it’s no monetary
policy but it has to do with the history
of those countries uh again certainly
the regressions that I’ve done that
include all countries the level of
inflation seems to explain a lot of the
change in the inflation afterwards now
could it be that the sum of that left
even if there is some shadowing of the
European Central Bank
yeah Michael
uh great presentation riet um I had a
question about the expenditure weights
how long does it take for these uh
energy expenditure weights to get
updated and are they updated on
consistent time frames across the
countries in your sample because in the
US for example takes there’s a
considerable lag for these expenditure
weights to get
updated
mirco thank you very much it was a very
interesting uh paper and presentation
and discussion I just said three main
questions the first one also related to
the first paper actually I have not seen
a a deeper discussion about inflation
expectations in in all of this and I was
wondering to to what extent these have
played a role in in explaining some of
the variations that we’ve seen across
countries and across regions um the
second one is also related to uh the
point that Isabel made and is about the
timing because in in uh in your U
presentation you relate uh let’s say oil
prices or Energy prices to changes in
inflation but we’ve seen you know we’ve
seen a large large swings in in in oil
prices also before uh the uh the war in
Ukraine but also we have not seen these
prices coming down in the same way that
we’ve seen inflation coming down right
so I was wondering whether maybe you
know the time can also help us
understand some of this uh
Dynamics and the third point is uh the
links with the ECB policy and uh and I
was wondering whether you know these
countries uh you’ve thought about
whether these countries should have done
uh more active interventions and uh in
in this so if of course you know
understand you know they have to follow
thecb policy you have this currency
board and everything but given that you
know the shock that uh they were hit
like it was definitely larger compared
or the inflation rates they were
experiencing were higher much higher
compared the rest of the Euro area was
there room uh on the side of policy
makers to do things somewhat different
not just to Shadow passively uh the uh
the ECB Monet policy thank you very much
aan so great uh presentation discussion
so one thing uh maybe this is a question
to you G Maria because the first paper
compared the uh emerging Asia with other
regions this paper basically focus on
within Europe uh and then made a
comparison
so the I I I thought in the case of uh
raet he can run exactly the same
principle component uh exercise which is
uh easy to do uh with other regions data
and look at whether it is the case uh
basically the big story is the you know
the oil price or the commodity prices uh
that that will be a kind of comparison
across uh the these three regions we are
discussing um the second thing uh raet
talked about you know maybe they were
making this big policy mistake actually
I was thinking the fact that uh other
than turkey most of them follow the ECB
I was wondering whether you see ECB a
kind of good anchor for these economies
and and actually that led to this
outcome in terms of uh how they uh
responded and the third uh issue uh when
I think about emerging Europe I think
about really the three big countries
refet mentioned how large turkey is the
other one is Poland and the third one is
uh Russia you did talk about uh turkey
and then Poland is in the sample I can
imagine why you excluded Russia but why
did you do it why don’t you tell us that
so thank you J and Marie and really
interesting presentation and discussion
I wanted to dig in a little bit on the
labor market side of that thing so a
really important part of the covid shock
in the US was a sharp drop in labor
force
participation and you had very strong
demand pushed by monetary and fiscal
policy against this this reduced labor
Supply which has been alleviated over
time by immigration and some rebound and
labor force participation but I wondered
whether some of these countries had and
and maybe their data limitations here
had different labor market
experiences so going to the point about
wages and there were so that there would
be different pressures across countries
on uh labor cost because they handled
the covid shock somewhat differently one
to another Etc so thank you so just two
quick points uh the first relates to a
number of the questions from Antonio
from ihan and it has to do with uh
relating the energy price
shock the intensity of the energy price
shock to commodity prices I think in
Europe the effect was larger than what
you can derive by just looking purely at
gas prices and oil prices and the reason
is electricity pricing that electricity
is priced on the basis in many countries
of the highest marginal cost
producer and that is gas so when gas
prices Skyrocket electricity prices
Skyrocket in countries even though not
all electricity is produced by gas so
you enormously inflate the margins of
you know wind and solar producers and
others uh but that has an important infl
component which you will miss uh if you
just look at overall commodity prices
the second is more of a curiosum on uh I
think your refet your use of Switzerland
was fascinating and it taught me
something I was always wondering why uh
Switzerland sold 150 billion of reserves
during 22 23 and now I I know my Capital
flow work I always wondered
why uh you know it went in that
direction anyway and fantastic
presentation and great discussion thank
you very much uh so I give the floor
very concisely R please and then we move
on to the third paper very good thank
you for the comments All well taken um
on on energy and core uh whether we can
do more so my more was looking at the
energy sensitivity of the production so
you know right how intensive and how how
much of that is imported energy right so
that works and that’s the way to see
that um you know the pass through is
directly to core not not only through
wages okay um um does o gas versus oil
matter it certainly matters um very
definitely quantifying that is not very
easy okay um it really requires a very
careful study of you know where the
other end of the gas pipeline is you
know when is it in Russia versus you
know azaran or Iran or turkistan or
whatever okay
um the energy weight that’s a very good
point um I worried about that um it’s
it’s actually something that changes
very slowly so the energy weight that I
show here is the 2019 energy weight just
to be sure that I’m not picking up the
mechanical effect of but if I did it
with 2021 22 I would have found more or
less the same things okay so that’s
that’s very good um inflation
expectations look um you know someone
with my um economic literature
persuasion that’s the first thing I
wanted to look at um most of these
countries don’t have much in that regard
um at best they have year out inflation
expectations which tend to be everywhere
around the world I mean Advanced
Emerging Markets alike um year inflation
expectations almost miror current
inflation so you learn very little you
want further out inflation expectations
no such surveys
um um then there was the links with the
ECB policy could they have done more I
don’t know I mean if you are if you
uised or if you have fixed to me unless
you’re going to go in your independent
way there isn’t much you can do on the
monetary policy side there’s certainly
scope in the fiscal policy side um and
these countries were somewhat
differentiated in that regard but
understanding fiscal policy is much more
difficult because it’s buried in a huge
budget and they are very good at not
being for coming about what exactly they
were doing there okay um is the ECB a
good anchor well um I’ll let um Isabel
answered that question um although I I
thought ECB actually did well and these
countries benefited from having anchored
to the ECB um why not Russia that’s
actually a very good question um but um
I’m I’m just not um tooled up enough to
distinguish the direct effect of the war
on Russia from other things um someone
should do it that’s not my expertise in
particular the questions of right you
know the abundance for example is we
talked about this for for Antonio’s
paper that’s really applicable for
Russia right you know these people were
exporting energy they couldn’t they had
a you know insane circle of of energy
what did that do to the Russian prices
and Russian product production it’s a
great question not one for me but you
know why don’t you take that one um and
then um on the countries having
different labor market conditions Point
very well taken I don’t know I may be
able to know this or not I don’t even
know whether it’s an answerable
question um jam Mar’s electricity
pricing absolutely right you know
Albania is a net electricity exporter
and that’s why right um Switzerland
produces electricity through Renewables
and um hydr Power that’s why these
countries were able to control the price
so tightly and it really made all the
difference thank
you okay thanks a lot let’s move
directly to the last paper I’m sorry we
don’t take a break but uh that would
mean we have a bit a bit more time to to
uh chat over lunch um and it is Juan
Pablo M Medina who’s gonna tell us about
the Latin American Experience thank you
okay thank you J Maria uh for the
invitation and for the opportunity to be
here uh uh is a joint work with Juan
Marco vasu from the Central Bank of
Chile so the usual disclaimer appli in
the case of him uh so uh as we discussed
in the first two so the the inflation
rise uh during the last uh after covid
was very uh important concern uh in many
countries
but for Latin America it’s a fundamental
test I would say because we have a past
record of many history of high inflation
so has been a progress so this was a
fundamental moment and several question
arise uh what are the empirical Trends
in in Latin America regarding inflation
before and after covid how this trend
compared to with other episode and with
Advanced economy uh and how do Supply
shocks uh or energy price shocks and
food price shocks translate to core
inflation and how different is Latin
America in this regard uh what are the
role of a monetary policy in during this
period so uh of course as Antonio and
also refet mentioned sometime due to the
data limitation sometime the sample for
each of these question are different In
the comparison we don’t have the same
data for all the sign of the country so
and and as um J Maria mentioned in the
morning so we uh in this presentation
and in the draft we try to summarize
resol across Latin American countries in
some way taking medium average and
comparing that with Advanced economy of
course this approach high heterogenity
as and this is important to keep in mind
okay um so I going to try to touch in
four levels H and this is going to be a
um a very short preview of our also we
have some idea of the gradual
convergency of Latin American inflation
in levels volatility in CPI composition
and uh similar to what we observe in
advanced economy and that didn’t stop
during the pandemic that is important so
it looked like the advanced economy so
uh earlier before the pandemic Latin
America was converging to from the top
to below to Advanced economy and during
the pandemic occur the opposite was the
advanced economy seems converging to
Latin America records uh the composition
of the D Factor so we I tried to we
tried to look for other inflation search
episode uh we look 2006 2008 and was the
intensity of course was kind different
but the driving Factor were different so
in the in the earlier episode was more
due to excess of demand and relative
price shocks and this episode was more
related with what we obtain more related
with the Persistence of inflation and
the rise of inflation expectation uh uh
and and and and and that is also
important and then we we look for the
propagation of Supply shocks and and and
these shocks T to be more in this
propagation tend to be more intense in
Latin America compared to Advanced
economy and that is related with some
nity effects so you’re going to see that
this is especially true when infl high
headline inflation is high or inflation
expectation are high uh and as many
already you know and you notice the
reaction of Latin America policy uh
monetary policy was was different in
this episode and in this episode uh you
can see that is no particular in this
episode is regularly that the monetary
policy in Latin America is more
influenced by inflation expectation and
but us monetary policy okay and these
two things rationalize part not all of
the what happened in this resent cycle
of monetary policy uh so that is the the
the preview and then I uh so there is a
very uh I going to so I Tred to connect
with three typ of literature so
analysing the episode there is a lot of
for advanced economy the propagation of
Supply shocks or propagation of any
inflationary shocks there is a lot and
the city monetary policy reaction in
emergy economies also there is a lot I
try to connect with this three dimension
uh so after this introduction I going to
try to show some the inflation patterns
in Latin America and try to compare with
Advanced economy so that is uh what I
said uh and then the transmission of
Supply shocks to core inflation so uh
and then monetary policy reaction and
then I going to conclude um so we are
going to compare inflation rates in
Latin America with Advanced economy we
use uh different database so there is a
database by an Coors uh with are very
comprehensive we also use a database
collected by by the colleagues of the
central banks they have less country but
what one interesting thing this the
harmonized CPI basket so they go a very
disaggregated level to try to make an
harmonization using the eurostat H
procedure and they also interesting they
can separate core inflation in goods and
in services that is something very
interesting to look at uh and
and uh so uh and then we with that
harmonized database we also try to look
for this question of the weights on the
CPI component try to understand looking
to the restent episode uh and try to
look for the inflation expectation and
try to make a Philip Square estimation
to try to understand the driving forces
of the recent episode compared to
another episode so in the next slide I
going to have the inflation rate in
advance
blue and Latin America red uh these uh
also have the shed area indicate the 2
5% percenti and the 75% so there is
heterogenity of course uh so let’s for
example here you can see the headline so
there was more disp in Latin America
compared to Advanced economy but you see
the convergency there less but in the
recent episode it seems that uh
for headline Advanced economy compared
to the record in that Latin America
usually have interesting uh in the case
of energy you see and probably that is
we didn’t touch in the detail regarding
this regulation of energy prices but you
see that in Latin America you see that
is more stable inflation inflation
energy that compared with Advanced
economy especially in the recent episode
in food you see the opposite you see
more variation uh and but again in the
recent episode it looks similar core
inflation there is a gap but this Gap
didn’t wide out uh during the recent
past H episode so you see this
convergency okay uh so and and using
this is using the the hangos database we
use try to look inside the core
inflation separating service and goods
and we use the database so the sample is
different so the S the sample of Latin
American country Advanced economy is
different the but we try to look inside
and what is increasing is also
surprising again the convergency is
there as well when you look core and
service I mean core inflation in goods
and in service you you see that there
has been was an increase in after the in
some moment of the inflation in Goods in
the left hand side and and then a fall
in the recent period this data
uh the advantage of this that has been
updated until February of the Year from
from the Central Bank of Chile so and
then you see what is the concern that in
many Advanced economy that is also a
concern Latin American country you see
the inflation in service is still above
what is the typical Target and and and
and they they look similar the the
pattern in the recent period okay um so
try to look with this weights in the
harmonized cpis you uh notice this is an
average in the recent period of the
weights so H fe fi T is food it’s not
exactly the same classification in the
other database that you have because
it’s has food alcohol and tobacco as a
whole component industrial goods that
are not H that are the the core Goods
energy separated and services and what
you can see here you have two for
a median set of country you have uh the
own weights and the Euro Zone weights
okay so what is interesting at least for
for us was to notice that of course
there is different with thean median
Latin American country and advanced
economies in this sample but as you said
food is more important in Latin America
than in in in Europe but it’s not that
big difference uh you you can see that h
energy doesn’t look so different
industrial world as well you not is more
different for the rest of emerging
economies in this sample that they have
so you notice more different in the last
row you see that the the food is 10%
difference in the weight you have uh the
the the own weights or the euroson
weights and then you see the other
difference is and the other side is in
Services servic is less important for
the own weight in the other but Latin
America doesn’t look so the for that
reason for that reason we say that there
is also a conver in the composition of
the CPI basket and the case of Latin
America and we don’t observe that in
other emerging market economies and with
this weight we try to make AUM in the
recent period okay for Latin America and
for for the other H set of countries and
this is a a a chart that tried to ER DEC
compose this so the the the first panel
is the inflation increase from the last
quarter 2019 to the peak okay and the
first bar contained the using the on
weights and then the second bar contain
what is using the aone weights so you
you see that the increase has been slow
smaller when you use the aoson weights
but it’s still you don’t see much
difference and probably you see that
there is food play an important role
using the own weights compared to using
the own weights and but there is no big
differ in the fall in the decrease from
the peak to the maximum decrease is also
you don’t you don’t see again the food
uh and alcohol and tobacco plays a role
you don’t see much different the other
thing interesting that you if you take
the difference in the February level of
annual inflation and compared to what
was the level in the last quarter of
2019 the overall because the number
sorry I didn’t mention that the the
average Latin American country in this
sample is using the own way is 3% above
the level of inflation that was previous
to the pandemic okay and most of that is
explained by
Services the the the contribution of
energy is low and the contribution of of
the other things are very small and that
result remain the same when you look you
use theone weights okay uh this
difference uh in the draft is because
due to the time I don’t have time but
it’s done by the advanced economy also
for the rest of emerging economy and
then you see for the mer economy these
difference are quite more substantial
especially in the in the reduction phase
okay but they they don’t share this last
result that overall the inflation is not
in average Is Not So Different be to the
level that your Ser previous to the
covid okay um uh inflation expectation
that something so we we this again this
a sample difference we don’t have from
consensus forecast the consens forecast
doesn’t have the 12 month ahead
inflation forecast what they have in the
mo in the year of the survey they asked
for the December forecast of inflation
of this year and the next year and with
that we create a series of 12 making
extrapolation so is there is a there is
no directly the data but you can see
that again what I showed you before that
this convergency of Latin America is
still is very evident also in the in the
inflation expectation that advanced
economy seems converging to From Below
in the recent period to uh what is uh
the uh the typical expectation in Latin
American countries okay so I try to to
pick this and try to ask Anton try to do
is a Philips curve I use I didn’t use a
output an employment rate I use an
output Gap use with a h PR filter that
also have many problems uh sometime but
uh but I try to do it just for the sake
of comparison and to to make the same
procedure to to compute and we tried to
to compute this uh F scare and what is
surprising that there is a many control
here there is time effects there’s
Country Fix effects and and there is a
panel different for five Latin American
country like five that are Brazil
Colombia Chile Mexico and Peru and for
uh
17 ER set of advanced economy and what
is important is uh when you separate
this with this harmonized database core
Goods you you can see that the role of
inflation expectation is important this
variable that we have particular for
each country is important to explain the
the and also you see s output Gap not
always significant you see it some
persistency role of La inflation
especially for COD core goods for Latin
American countries uh you see the
different for the core Goods uh and and
core service in Latin America you don’t
see top much difference regarding
Advanced economy but and what is
interesting that the only feedback
because we have the control
also many controls and also the the
headline shocks that Mia was mentioned
so we have the food price shocks in this
we have the energy price shocks as well
the pass but it’s important that ination
with the core goods and service will
also put the lack inflation of the
opposite component of the ER CP the core
CPI so for the core Goods we have the
lack core inflation in services and that
is the only thing I show you here what
was significant that in the case of
Latin America and this occurred not only
in the resent episode it was regularly
happening that each time that
the Ser inflation in Services increase
there is a tendency to a fall in goods
and there is talk about some relative
price adjustment probably that is
occurring in Latin America that you
don’t observe significantly this that
effects in uh uh Advanced economy uh and
with that we try to make AUM with this
regression that have point esate so uh
here we have the bar with the
composition and the mention here is with
the core inflation in Goods so you see
the comparison the first bar are the
episode that I mentioned in 2006 2009
and then you see that increase in in
that episode was 2% was much much
smaller than what occurrent and and and
then you see that the diving factor most
was more like a the the blue and and
green relative to the 2% that are the
output Gap another price shocks in this
recent episode for Latin America you see
that you have the persistency a a higher
role and also uh uh the inflation
expectation uh and and you see also
again that the comparison with Advanced
economy and again remember that this
estimation is separated the coefficient
are estimated separated for the Latin
American country for the advanced
economy so the coefficient are different
uh so but then you see that the the
composition are not so different with
Advanced economy is smaller than intense
what you have in the last bar uh but but
the composition is quite similar so the
the role probably what one different is
the relative price CH chocks that are
the green bar here that are energy
probably in the case of advanced economy
that doesn’t play an important role in
the case of H core Goods in Latin
America but also the red bar is this com
common component okay okay so still this
global factor are important explained
even in the previous episode and
different episode Latin America the same
you can do the same for the service that
I did and again some difference emerge
regarding what is is done in the
previous case but you can you can see uh
that again the common factor the time
fix effects are important and the
inflation expectation are very important
in the recent episode also previously
and and and that’s sort of say that
again there is some difference at least
in Latin America regarding other episode
that was more driven by uh price shocks
and uh and excess of demand in the
previous in this period was more
persistency and inflation expectation uh
so let me try to go to this transmission
or propagation of Supply shocks uh to
core inflation so the idea is pass
through of energy price shocks to cor
CPI uh and try to do this kind of bar
creation so try to compute additional
effects under high pass headline
inflation so that that we control for
past headline inflation but also we make
the interaction what is the effects of
the same price sh energy price shocks
when the head high headline inflation is
high okay and for each country we made
this procedure ER I don’t know was used
for our gorenko regarding try to compute
the fiscal multiplier different
dependent of cycle here in instead of
being dependent of the growth of the GP
is based on the headline inflation of
each country okay uh and then H we are
going to compute this uh so I first I
going to do it simple just so this
regation have is a panel again separated
Advanced economy Latin American economy
we have several control time fix effects
uh and it’s important because in in a
previous H estimation
that come up in this discussion that uh
if you don’t control for Time effects in
the case of a economy you’re going to
see that there is a higher increase in
the pass through of energy to uh to cor
inflation but when you control for Time
effects that take all that that effect
so that’s important when you include the
time effects uh you get that so so and
the what you expect I don’t know for for
for this part I wasn’t so the the red
line is Latin American America and then
you see that the path through of energy
price shock to core after all the
control is higher okay and clearly
higher uh in the case of Latin America
okay and you can do it again separating
sample okay try to to take a a sample
between 2000 2011 between 20 2012 and
and the last data that we have in 20
23 and you don’t see much the difference
so
taking the and again the the result
survives in the idea that the pass
through is higher in Latin America and
it doesn’t look much different now than
in the previous sample okay after
remember after that you control for Time
effects that is what you you get uh
inside each group of country okay if you
do it again separating goods and
services the same result emerg so this
result is robust so you do it the pass
through in goods and services again
again Latin America have a higher p
through that in the case of advanced
economy okay so regarding this
additional effects so the idea is you
make the interaction so you make the
interaction what is the additional
effects under so the Basel line here is
the environment of low inflation for
each country so each country have the
the variation of inflation so each
country is measured with the own uh
temperature measure of inflation so it’s
no absolute levels is relative for each
country so an environment of flow
inflation is the Baseline estimation and
on top of that there is additional
effects okay and this is estimation of
the additional effects and that it
related that that explain a little bit
that this additional effects is higher
in Latin America when the inflation is
high headline inflation the past
headline inflation is high and this
effect is not present in advanced
economy okay and then you see still you
see a in s Horizon long Horizon a
quarter you see that when the inflation
High headline inflation is high you tend
to see a smaller path through okay
relative to the base in advanced economy
and then you observe the opposite in
Latin American countries uh surprise for
surprise of us we didn’t we did the same
for the full price shocks and we didn’t
find much different regarding Latin
America and advanced
economy but we do find that we make also
interaction regarding the high headline
inflation and we don’t see much
different that is the additional effects
but when the inflation expectation are
high these sh price shocks propagate
more intensively in Latin America and
then you don’t observe this phenomenon
in the case of Advan economy so there is
something regarding again that many
people mention but probably this is not
test but there is something regarding
the credibility of monetary policy in
Latin America compared to advanc economy
there is something that uh for the
reason we we try to do the last exercise
is try to make try to rationalize the
monetary policy reaction in Latin
America compared to Advanced economy and
again due to the to the data that we
collect we Tred to we prove many things
and we um and also following the idea of
Antonio and Steven kaming present uh we
we have this idea try to to understand
the changes in the recent episode of
monetary policy so the rise of monetary
policy rates in this period and another
period that was the the boom of
inflation that was I mentioned 2006
2008 uh and Tred to compare the uh again
the average of Brazil Chile Colombia
Mexico and Peru with a set of advanced
economy okay and uh this our estimation
is not a standard one because I using
quartly data no it’s a cross-section
it’s a quar data but I try to explain
the change in monetary policy usually
estimation is with the level try to I
try to explain so we put core inflation
output Gap inflation expectation one
year ahead the same data that I show you
and also the change in this variable
okay uh Country Fix effects and and and
and and that those element and that’s is
the estimation again separating the five
Latin American country the fight
Advanced country and what is very
interesting is the sensity to the change
change on inflation expectation Latin
America is quite big compared to
Advanced economy okay so react the
changes in monetary policy tend to
follow more intensively the change in
inflation expectation and you don’t
observe that in advanced economy you see
some reaction some dimension of Contra
cyclicality with this measure of output
Gap with h Prescot that you you see also
americ country and as you see also in
advanced economy but what is striking is
this different reaction in term of H
inflation expectation okay uh so we try
I Tred to look the average change in
monetary policy in Latin American
country in the panel a is the period
between the third quarter 2006 to the
third quarter 2008 and then this is
increases in this each quarter of the
rate and then the blue line is the
actual average increase and the red is
the prediction of the equation okay in
the previous episode of Boom inflation
it seems that monetary policy was a
little behind the curve in in using this
equation uh in uh in the recent episode
it looks I don’t know it follow
something but no probably the intensity
or the timing is not exactly the same in
the in the increasing pH but then when
you have to easy a little bit the the
break H the the prediction is it call
for a more mod monetary policy and you
don’t observe that in the data why why
happened
that uh and the typical two things that
H all the Latin American concern is uh
one could be the US monetary policy what
happened with the US monetary policy and
we tried two different approaches so we
try to include also the past changes in
the own monetary policy rate the past
changes in the us monetary policy and
also another specification that have the
difference between the own monetary
policy rate and the US policy probably
that means uh you you should include
thechange rate what happened once you
includes the inflation
expectation the exchange rate never
appear in this specification of tailor
rule always capture everything the
inflation expectation we didn’t do it I
I thought it but I I couldn’t do it try
to make the connection between how
sensitive are inflation expectations to
the exchange rate but I I didn’t do it I
I should have do it uh but this that so
uh and also the comparison sorry also
the comparison with the the this panel
reproduce what I showed you in the
previous slide but also the average
change in monetary policy in advanced
economy in the F of economies with the
equation that estimate and and then you
see that in the early phase of rising
was the estimation as for a higher rate
but then you cannot explain that it has
been lower in increasing afterwards that
when it was slowing down in that part
but I I include that and and just with
this I going to try to uh end uh there
is two specification one in all these
two new specification include the past
changes in monetary policy on each
country but also the change in the first
two columns the change in the uh the
past change in monetary policy in us and
what is important is and here I include
I exclude us so we have four countries
here Advanced economy that I mentioned
and and the Latin the five Latin
American country and then what you say
see here is that role is more intense in
Latin America than in other Advanced
economy and when you you also consider
the difference between your own rate
with the the the the monetary polic rate
in US that effect also is bigger in the
case of Latin America and that can help
to reproduce the idea that in the early
episode The the increase in the rate was
higher expecting with the rule but when
you include this you are getting closer
not exactly closer but you are getting
in in the gra is that graph is included
and also in the recent episode when you
when you you expect a lowering or easing
the the monetary policy rate or the
magnitude you can explain a little bit
better that phase okay so that is uh I
with that I going to conclude okay so
there is two main four main message so
Latin America inflation has exp a rem
remarkable conversion and stabilization
the last few decades alignment with the
advanced economy and level and
volatility uh convergence continue
surprisingly continue postco and also
converence into advanc in composition
the CPI basket that that you observe uh
that in other set of emerging economies
C inflation rise during was clearly more
severe than during the the other episode
that doesn’t occur in many other part of
the world and in the in the previous
episode the KE driver was output Gap and
price shocks the CR drivers uh on on and
was in the recent episode was persistent
inflation uh expectation the uh still in
both epod the subti contribution of
factor captur for the time effects the
third message is the transmission of INF
shocks is more intense in Latin America
uh more propagation observe when
inflation headline inflation or
inflation expectation are high uh so
this a a concern that maybe we we are
happy that we controlled inflation the
previous year and we are so lucky that
we don’t have to keep pushing a little
bit the role of Central Bank
Independence and many other things
institutional Factor this is a ring of
alert I mean regarding that we still
have potential to enhance more the
monetary policy credibility in our
countries okay and monetary policy uh in
Latin America react more to inflation in
cost us to advanc economy to more to
inflation expectation and to us monetary
policy the first Factor help to explain
why central banks raise the rate faster
and more aggressively during the 22 and
22 um 21 and 22 and and the second
Factor contribute to understand the
lower normalization of the monetary
policy rate since mid 2022 okay thank
you thank you Juan Pablo and I’ll
discuss is Ian course
thank you J Maria for inviting me it’s
great to be here uh discussing this
paper uh Jia sent me an email asking me
which region I would like to discuss and
I said I don’t have any preference and
he picked Latin America because I am
from Latin America you know in some
circles turkey is considered a Latin
American country but uh uh I think based
on what Juan Pablo said and based raet
said I think turkey is in a now
different group it’s not in Latin
America anymore it’s not in emerging
Europe it’s somewhere I don’t know where
it is now uh so
the this paper the Juan Pablo and ju
Marcos wrote a very comprehensive uh uh
I have some ltin American Central
Bankers I asked them in in in in our
group uh to look at the paper
uh guo is here emilano I think is online
and I also ask my longtime collaborator
on these issues John G he happens to be
ex Central Banker as well so they they
contributed to my discussion now um let
me try to summarize the paper as uh ju
Pablo uh cover the ground um a lot of
things going on in this space
the idea is to take the Latin American
countries and compare with advanced
economies over the past two decades if
you realize he said something at least
three times he said advanced economies
converging to Latin American countries
in inflation Dan con is here Steve is
here you see what’s called the world is
upside down now at man econom is
converging to Latin American count so so
during this period this past two decades
there’s low and stable inflation in
Latin America there’s significant
commodity price volatility Global
financial crisis and of course the
co9 um the paper uses multiple
methodologies actually uh this is
estimation of uh Philips curve uh there
are some estimations of these local
projections
models and then there is this you know
the kind of the tailor rule estimations
a set of those and the other thing the
paper does it uses multiple databases
but multiple samples that’s very more
important actually the multiple
databases U so this is a very ambitious
draft uh if you want to learn about uh
Latin American inflation and think
through uh uh these issues uh it is it
is I think very uh clear value added so
I was thinking about what are the main
results I’m going to focus on the four
of them and simplify them first uh about
the convergence of inflation there’s a
clear result that inflation whether you
look at the level or the volatility in
the region uh converge to that in
advanced
economies um the second the drivers of
inflation they uh the paper looks at
this you know what happened 2122
and there the kind of the story is there
is this uh Persistence of inflation that
this lack effect and the rise in
inflation expectations this both related
to core but the different components of
core that explains the surge in
inflation uh so the third result is
about the uh response what the kind of
the what what are the variables uh
driving
uh there are these inflationary shocks
taking place in advanced
economies uh that play a kind of an
important role in basically uh Latin
American
inflation and um that that even kind of
the more important when you think about
uh periods of high
inflation uh in the past or uh High
inflation
expectations and finally the paper also
looked at Monetary
policy uh and there the big result is
really uh how important inflation
expectations and uh us interest rates I
think all in all uh you know the rich uh
set of results uh clear as I said value
added to this literature um
the I’m going to focus on four issues
here the first one is this convergence
of lack inflation and what basically led
to this
outcome I’m going to say that probably
that’s temporary and driven by U some
policy changes and good changes in the
region uh if it is not temporary it will
require actually Latin American central
banks do something about it second uh
the as much as you know we would like to
think about inflation role of the past
inflation uh the consumption baskets Etc
and the monetary policy you know how uh
it it
responds uh we would like to focus on
certain models that are going to give us
something about the fundamental shocks
in that sense my discussion is going to
be somewhat similar to what PR said and
Isabelle said you would like to see you
know a discussion of Supply demand uh
commodity prices external shocks uh
domestic shocks and then third uh and uh
ju Pablo uh alluded to this uh when I
think about inflation and monetary
policy
response you know the currency
depreciations or appreciations play a
significant role in emerging markets and
the this is a kind of a uh top top of
Mind issue in emerging market economies
nowadays um um and finally I will uh
make some uh uh suggestions about the
paper uh for the next draft so first let
me talk about the convergence of
inflation so I have yes uh during this
episode and prior to that there was a
convergence U But ultimately this
convergence is probably driven by how uh
Frameworks in uh monetary policy making
and how much room central banks uh given
in terms of you know uh Implement
monetary policy uh over the past I would
say three decades in the region and uh
our work shows when countries basically
adopt inflation targeting become more
independent in terms of the central
banks uh inflation tends to come down
that’s a basically Universal result uh
but they are going to basically take it
very seriously they’re not going to be
uh independent or having inflation
Targets on paper uh I think that’s what
happened in the case of Latin America
that’s why inflation expectations become
so important to explain uh monetary
policy response the second issue is that
uh it might be true actually let
American countries inflation converge to
the inflation advanc economies but if
that’s the case uh they need to do
something about inflation targets
because you know uh in advanced
economies inflation targets are around
2% when I look at uh Latin American
countries you see it on the left uh uh
targets around 3 and a half four uh even
you know close to 4 and a half% so the
the uh the this observation about
convergence has an implication if it is
true down the road um in terms of what
should be the Target in the in the
region should Target should be lower if
it is truly you know uh similar to
Advanced economy inflation levels now
the second uh observation uh what are
the drivers of inflation or the response
of monetary
policy now the paper has these exercises
one is a Philip scure exercise another
one is a local projections and another
one is a tailor
rule um the these exercises look at the
drivers of inflation and drivers of
policy interest rates in the
region and they bring a lot of uh good
results uh but I was thinking maybe it’s
better to use a kind of a framework it
could be just a you know same framework
actually for all these questions uh Juan
Pablo focusing on that could be a
structure V model with well defined
restrictions that will
help um in a sense to uh uncover these
fundamental
shocks in an integrated approach and
then answer questions how important are
the demand and Supply shocks how
important are external shocks versus
domestic shocks commodity prices uh
Global rates interest rates terms of
trade exchange rates and uh we worked
with different uh uh versions of these
types of models and they are very uh in
a sense flexible you can have a global
block you can have a domestic block you
can have a multicountry model let me
give you some examples using the results
in this uh paper so
for example there is this result the
recent surge in inflation was driven by
inflation expectations whether it is the
core whether it’s the services or the
goods uh I will ask you know the that
result is a good result but the the
question is that uh what’s going on
fundamentally is it because some Supply
disruption there or uh that leads to you
know the the supply shock or there is a
demand shock because fiscal policy uh
plays a role U Juan Pablo did not
discuss for example the kind of the role
of fiscal policy or other interventions
during this period and there were you
know many of those there another result
for result about the role of output Gap
uh that contributed less to inflation uh
during this period than uh 2006 2008
cycle which is kind of a you know the
counterintuitive but uh the the bottom
line is that again what was the driving
force of that output Gap that led to
basically uh movement in inflation and
then that again pushes you to a corner
to think about the demand and supply and
you know the other
factors the result about monetary policy
again relates to inflation expectations
which is a great result it’s a success I
think of monetary policy in the region
but there as well
uh the what is the kind of the
underlying uh Source uh this might come
across as a kind of a non-traditional
exercise decomposing the policy rates
but there is a lot to be learned we are
working on an exercise like this one
nowadays so uh I think it will be useful
to to think about um a kind of
integrated framework to bring together
these different
questions the third observation
which P mentioned the role of uh
currency
movements so uh in terms of explaining
monetary policy but as well as
inflation um the paper talks about you
know inflation expectations the
commodity prices the US interest rates
they all they’re all relevant to explain
inflation and monetary policy uh
responses these are in different
sections of the paper but the the big
issue is that how important is the uh is
the you know the the the currency and
the MS in currency in fact we looked at
this issue in the context of what
happened in
2022 um and um there is a big difference
in countries they had uh you know double
digit uh depreciations in terms of how
much inflation increased uh in that year
versus those they just had a single
digit depreciation so ultimately uh in
some cases this p through so large that
uh translated into much higher
inflation in a different exercise we
also looked at you know the how the
policy interest rates in emerging
developing economies respond to uh the
depreciations if these are especially
large depreciations and the you see the
on the right uh the monetary policy does
respond uh and and that response
actually gets larger over
time so finally as I said this is uh as
a draft paper uh the what can the next
draft do the paper is very rich uh uh in
the current draft uh there are 11
questions in the introduction my
suggestion is to reduce the number of
question and be very aggressive uh when
I say reduce I mean
80% uh and the second I think a lot of
results uh uh some of these results uh
the show uh the kind of the you might
think that you know the uh the the the
composition the inflation basket how
that’s composed is important but then
you basically undertake all these
exercises you see that maybe it’s not
that important so the maybe those
results can be in an appendix but the
you can focus on the strongest set of
results I really like the results about
for example inflation how they it
relates to uh inflation expectations
monetary policy how it relates to
inflation expectations because there’s a
very nice consistent uh narrative that
comes out of uh those those sections and
I think I find those parts of the paper
very actually strong and then there’s
this multiple samples uh and databases I
think databas is fine but it’s very
important to keep the sample same from
one section to another or within the
that section especially the sample uh
comparison this Advanced economy sample
also changing not not just the lack
sample and the finally the the the I
think one could do look at just two
three headline results and undertake
quite a bit of robustness around those
headline results that will lead to uh I
think a much richer uh in a sense uh uh
uh outcome so what is the big summary
here uh if you would like to understand
lack inflation over the past uh 2 and a
half decades uh Juan Pablo and Marcus
put together a very ambitious piece uh
and and really the kind of uh super rich
in terms of the data in terms of the
models uh and compared it with advanced
economies uh a lot of striking results I
think I did not realize how much
actually Latin America has made progress
when it comes to inflation and how in a
sense uh close the gap with uh Advanced
economy inflation in that sense there is
clear value added uh in this paper um
but the bigger uh uh point
is we need to conduct more research or
on lack and uh Emerging Market
developing economies inflation and
monetary policy there I’m going to stop
being a discussion and uh have my hat
being a promoter uh so the uh we uh have
extensive work program in the World Bank
on this issue uh there are many reasons
for that but uh really ultimately uh in
emerging developing economies unless you
have price stability and a well defined
monetary policy
framework difficult to see uh sustained
growth and we have uh you know analysis
showing that so we are working
a number of uh projects U with these ex
Central Bankers in our unit some of
these results uh presented in our work
uh this week on Thursday we are going to
release the new commodity markets
Outlook and it’s going to talk about
recent developments in commodity markets
and consequences of those developments
for inflation so let me stop there thank
you thank you ihan um we are running a
bit late so I’ll collect
questions uh I I want to give the floor
for a moment to Juan Paulo to respond
let’s try to be concise both on the
responses and the questions as well
thank you okay thank
you very nice discussion uh yes I agree
with most of them uh yes regarding the
focus my my
fault I will say that it’s my fault try
to put too many too many things on the
plate uh maybe I to don’t have a
narrative regarding the yes in the in
the end I I realized that yes you make
the estimation but you don’t know if
this coefficient of this variable is the
chocks or there is something behind the
that is moving that variable so I have
to think a little deeper on that uh uh
regarding what is driving the the result
uh behind this variable that is capture
many other things that are changing over
the so that will will say that that is
uh my reaction
in general but I will take and
comment okay let’s let me go this time
from the other side
francisa thank you very briefly i’ like
the services and goods distinction
because so much of energy and food
prices is actually services nontradable
so this is nice um one question in Latin
America in a way is a bit like a Asia
with a lot of heterogenity across
countries you’ve got got Colombia and
Indonesia that are energy exporters and
would have benefited you’ve got
Guatemala Costa Rica you’ve India energy
importers who would have suffered from
the global Energy prices did you explore
that
hogen hi thank you very nice
presentations H you highlighted the
difference in transmission mechanisms
from Headline shocks to core in Latin
America and the role of inflation
expectations just a couple of questions
one is if you had done the exercise of
trying to quantify whether the
difference inflation expectations
Behavior actually accounts for all of
the difference in this transmission
between Latin americ and advanced
economies and second one whether you had
looked at different Horizons of
inflation expectations it seems
something remarkable about the recent
episode is the stability of medium-term
let’s say five year ahead inflation
expectations had they moved maybe the
the stories around credibility would
have been more important but if you
looking at one to three years maybe
something more about persistance I was
wondering about that thank
you okay thanks
uh oops I’m missing sorry uh go ahead hi
uh actually C took a lot a lot of my
questions but um so I think the one year
ahead inflation expectations is not a
measure of central bank credibility
issues it’s more picking up the effects
of commodity shocks and the effects it’s
going to have on inflation over the next
several months so um inflation
expectations long-term inflation
expectations are where you would go um
and so I actually for some of the and so
here’s where I think a bit more
discussion about the heterogenity across
countries would be really helpful and I
thought like going down the road that um
Isabelle and Rett had suggested would be
would be good um so one thing was
striking for Brazil I was looking at
this is uh how how low they are the far
forward inflation expectations of 3 and
a half% and um and so Brazil embarked uh
around 2017 on a mission of reducing its
inflation Target to that of its n of its
uh main trading part well its neighbors
uh not not Argentina but um to Chile uh
and and Mexico so it’s 3% now and so um
I think it’s remarkable um and and so so
I I I think uh
so that’s one thing to to think about
and also I mean I just just uh casually
looking at countries like Chile and um
and Colombia they they had major
political transitions that produced ex
larged exchange rate depreciations or at
least it seems so and so that seems to
be separate from the kinds of shocks
that that you’re that that we’ve been
talking about so far and I think it’s
something to take into account thank you
maybe just picking up on a couple of
those themes I mean I I guess I’m I’m
totally confused to be honest haven’t
read the paper but looking at your
presentation if you’d given me all all
your
analytics which show a massive a much
higher Lam response to external shocks
for inflation and you’d ask me and I
didn’t know the numbers what had
happened to latam inflation I would have
said oh it’s clearly going to be massive
compared to the DM world you know there
turns out completely opposite you know
your starting point was the correct one
which is that there’s actually been an
amazing development which is you know
America sneezed and latan didn’t catch
an inflation cold for the first time in
you know 50 years and I suppose what i’
be looking for and I apologize I hav a
chance to read the paper is okay why is
that what is that you know your response
functions tell me the opposite it should
have happened the question is why didn’t
it happen I I think to be honest a lot
of it comes back to that Old Chestnut
Central Bank credibility and the way
that central banks acted and I think
that showed most notably in currency
performance um and I you know one of my
favorite pop Cris questions is to say
apart from the Swiss frank which has
been the strongest world currency over
the last eight years and it turns out to
be the Mex comp Pacer go figure
yeah thank you uh my question uh about
the uh uh relationship between uh
productivity uh Trends and the uh the
story about uh inflation uh in Latin
America uh this may be going a little
bit uh uh Beyond uh the paper uh uh the
Region’s productivity performance uh has
been uh very poor I saw a paper recently
which shows that uh between 1990 and
2017 average tfp growth in the region
was minus 0.8%
perom uh now other things being equal uh
lower productivity growth can increase
cost pressures in an economy you have
lower labor productivity growth
translating into stronger increase in uh
uh unit labor cost so so my question is
how do the authors see uh uh this
relationship between uh
productivity and uh inflation Dynamics
in the region uh in uh more recent years
and and and and what does uh the
Region’s uh poor productivity
performance
imply for the tradeoff between uh growth
and inflation that uh the region faces
thank you
Steve so Phil argued that um taking into
account Latin America’s history of high
inflation and the pi estimated uh passrs
uh that W Pablo estimated uh for the
region that you would have expected that
Latin American inflation would have
surged a lot higher uh than advanced
economies uh during the recent
period but you could also note that you
know uh Latin America didn’t have the
super strong fiscal
stimulus of the United States and didn’t
have the exposure to uh super high
natural gas prices that you experienced
in Europe so you could imagine that in
fact it’s surprising that Latin American
inflation Rose as high as it did so I’d
be kind of interested I think it’d be
good if the paper could F focus a little
bit on that big picture question you
know was Latin American inflation H
surprisingly High surprisingly low or
did its very proactive monetary policy
tightening actually
counterbalance uh you know it’s kind of
like history of high pass through
leading to inflation about the same as
in other
countries thanks
Steve I’ll be brief in the interest of
time I was just wondering um uh the
decompositions you had shown with very
little on you know headline inflation
shocks particularly energy I was
wondering whether you know that is
actually captured also in your time
effects and also in inflation
expectations because you know one of the
key mechanisms during this crisis was
headline inflation shocks passing into
core through inflation expectations so
in a way Al also you know the
implications could be a bit misleading
you know if if if we say that you know
relative price shocks or headline
headline inflation shocks did not matter
in Latin America thank
you so um very rich paper uh but I’m
going to raise an issue that is sort of
enriching say asking for more but I
think ihan has good suggestions on how
to to trim it on uh uh you know how to
to to to reduce a bit the number of
exercise as you present I missed country
color uh there are very Stark
differences in policy response in Latin
America Mexico had no very little fiscal
support Brazil Chile Colombia went much
bigger um there all that is a is a bit
lost to me I think it would be great to
have some Focus uh more Square L on the
episode maybe at the you know covering a
little bit less the history of the past
20 years which I think is yeah people
are are a bit more familiar with but I
think it would really enrich the paper
to provide some uh you know because some
of these are are question mark you know
Mexico still has uh pretty tight
monetary policy stance and underlying
inflation pressures now they have
electoral spending going on uh but uh
but yeah but the path of policy support
was quite different the exchange rate
Behavior was different so lots of things
to to think about on that front and with
this uh floor back to Juan Pablo thank
you okay thank you so much for for the
old comments uh I will say that uh I
don’t know I tried to uh look from the
um uh so I got try to put the comment
into s so the the um they want to make
more uh the connection between for
example dis quantification of higher
path through other how fit with the this
episode
so again probably we didn’t do it that
well that that connection so I we have
to follow more The Narrative yes I agree
with the the that what important is
long-term inflation expectation but to
have a sample side of or comparison
country we use this consensus forecast
that is 12 I get I agree that it doesn’t
capture all the mention the the cility
but the important thing is in our
estimation was Tred to uh for example in
the pass through Energy prices or food
prices was the interaction so I I aware
that doesn’t capture all the cility
issue but what we well try to show that
this transmission of full price chocks
are higher when the this inflation uh 12
month ahead are are higher and is the
pass inflation expectation anyway so um
and I think um yes the regarding the
angle uh J Maria was send send me I mean
make this comment in the morning yes we
have to to look to De deeper regarding
the the variation and uh uh these
country are different in during the the
co and we have to touch better on that
okay thank you
well uh thank you all I think my only
closing remark is going to be that
you’re all invited for lunch it is in a
room adj to this one Summers just down
that way way no not ad the other of the
security boof okay you you can tell I
haven’t learned in three and a half
years of
Brooklyn the the names of the various
Roots but thank you very much to all of
you uh I yeah Special thanks to to to
Isabel PRI uh to ihan for uh discussing
this and of course uh Juan Pao uh
Antonio refet for tracking all the way
to DC and I think you know Stephanie did
a fantastic job with Howen of setting
all this up so many thanks to her and to
everybody that has been helping on the
Brookings front to organize this
conference so thank you very much
okay
A conference from the Hutchins Center on Fiscal & Monetary Policy considered the recent inflation episodes in emerging markets and lessons from policymakers’ response. Three papers were presented, each with a regional focus: emerging Asia (Antonio Fatás of INSEAD), emerging Europe (Refet Gürkaynak of Bilkent University), and emerging Latin America (Juan Pablo Medina of Universidad Adolfo Ibáñez). Each presentation was followed by a discussant’s response and a moderated conversation with attendees.
Viewers asked questions of the panelists by emailing events@brookings.edu and on X/Twitter using the hashtag #EmergingMarkets.