Open AccessEstimating Venezuelas Latent Inflation
Author(s) -
Juan Carlos Bencomo,
Hugo J. Montesinos,
Hugo M. Montesinos,
Jose Roberto Rondo
Publication year - 2011
Publication title -
the international business and economic research journal/the international business and economics research journal
Language(s) - English
Resource type - Journals
eISSN - 2157-9393
pISSN - 1535-0754
DOI - 10.19030/iber.v7i4.3249
Subject(s) - inflation (cosmology) , economics , econometrics , consumer price index (south africa) , phillips curve , monetary policy , price index , real interest rate , index (typography) , macroeconomics , computer science , physics , theoretical physics , world wide web
Percent variation of the consumer price index (CPI) is the inflation indicator most widely used. This indicator, however, has some drawbacks. In addition to measurement errors of the CPI, there is a problem of incongruence between the definition of inflation as a sustained and generalized increase of prices and the traditional measure associated with the CPI. We use data from 1991 to 2005 to estimate a complementary indicator for Venezuela, the highest inflation country in Latin America. Latent inflation is defined as that component of measured inflation that has no impact on real output in the long-run. This notion, consequently, is consistent with a vertical long-run Phillips curve and therefore it is grounded on economic theory. Latent inflation is constructed placing dynamic restrictions on a structural vector auto regression system. We find that latent inflation reflects more closely the generalized and sustained price increases most likely to be impacted by monetary policy. Our results are consistent with the identifying restrictions and with the theoretical definition of inflation.