Testing for Transmission Effects on Inflation from Shocks in International Food Prices: The Case of Mexico for the 2005-2015 Period
Guillermo Benavides *
EGADE Business School, Tecnologico de Monterrey, Mexico
Alejandro García
UNAM, Mexico
*Author to whom correspondence should be addressed.
Abstract
We test for possible influences of international food prices ‘shocks’ on observed (ex post) aggregate prices in Mexico. The sample period under study is 2005-2015. As an extension to previous related works we also use another inflation measure known as Break-Even Inflation (BEIR). The latter is constructed with information from nominal and inflation indexed bond returns in order to obtain a theoretical inflation measure. This indicator is a ‘forward looking’ (ex ante) measure of inflation. To quantify the transmission degree from international prices to Mexican inflation we apply a Factor Augmented Vector Autoregression Model (FAVAR). The results show that there is statistical evidence of transmission from international food prices ‘shocks’ to Mexican inflation in both inflation measures (ex post and ex ante). These transmission effects are relatively persistent through time.
Keywords: Break-even inflation, inflation FAVAR, price shocks, price transmission