Original scientific paper

https://doi.org/10.3326/pse.45.1.4

Effects of fiscal credibility on inflation expectations: evidence from an emerging economy

Juan Camilo Anzoátegui-Zapata orcid.org/0000-0003-0588-1364 ; Universidad Autónoma Latinoamericana, Department of Economics, Medellín, Colombia
Juan Camilo Galvis-Ciro orcid.org/0000-0001-6680-275X ; Universidad Pontificia Bolivariana, Department of Economics, Medellin, Colombia

Abstract

This paper analyses the impact of fiscal imbalances on expectations for an emerging economy with inflation targeting. In particular, based on the Colombian experience, we build a fiscal credibility index and evaluate its impact on inflation expectations for the 2004-2019 period. To analyse fiscal and monetary interactions, we propose an econometric model and use the OLS and GMM methods. The results show that the loss of fiscal credibility, associated with divergences between the fiscal deficit and agents’ expectations, can increase inflation expectations by between 9% and 12%. Furthermore, inflation expectations in Colombia incorporate important macroeconomic information related to unemployment, GDP and exchange rates.

Keywords

inflation expectations; fiscal policy; credibility

Hrčak ID:

253400

URI

https://hrcak.srce.hr/253400

Publication date:

9.3.2021.

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