Browsing by Author "Esquivel-Monge, Manfred"
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- An Endogenous Regime Switching Model for the Exchange Rate Pass-Through Effect in Costa RicaEntendiendo el efecto de traspaso (ET) es crucial para la conducción de políticas de una economía pequeña y abierta como la de Costa Rica. En este documento, proponemos un modelo de vectores autorregresivos con cambio de régimen endógeno (RS-VAR) para estudiar el efecto de transmisión del tipo de cambio en Costa Rica. Identificamos dos regímenes: ET alto y ET bajo. Este modelo permite que las probabilidades de transición sean influenciadas por variables endógenas como la inflación, los precios del petróleo y el tipo de cambio. Encontramos que: i) el ET es de 4.5% en el régimen bajo y de 60% en el régimen alto, ii) un bajo ET resulta de períodos de alta volatilidad del tipo de cambio y, iii) un choque de inflación aumenta la probabilidad de una baja transmisión. Dada la evidencia, recomendamos considerar el ET oscila entre períodos de alta y baja magnitud en lugar de tener un valor único.
- Asimetrías en el traspaso del tipo de cambio durante el periodo de flexibilidad cambiaria en Costa RicaThe paper analyses the exchange rate pass-through to domestic prices in Costa Rica during the current exchange rate flexibility period and tests whether there is evidence of asymmetry. For this end, we estimate structural distributed lag models that encompasses symmetric and asymmetric data generating process in line with Kilian y Vigfusson (2011). We found evidence of sign asymmetry in the bivariate relationship between inflation and exchange rate and when controlling for interest rate differential and output gap.
- Efecto de cambios de precio en materias primas sobre los precios domésticos en Costa RicaThe paper analyzes the pass-through of commodities prices to domestic prices in Costa Rica at a macroeconomic and microeconomic level. We analyze whether the pass-through has been strengthened or weakened over the last 40 years; whether commodities price increases have bigger effects on domestic prices than decreases (sign asymmetries); whether the magnitude of the pass-through is proportionally bigger as the size of commodities price changes are increased (size asymmetries) and whether commodities price volatility conditions the size or the asymmetries of the pass-through. Finally, for those industries in which price increases have bigger impact on domestic prices than decreases, we analyze whether such asymmetries are exacerbated by a less competitive structure of industrial organization.We use VAR and structural distributed lags models to deal with the asymptotic bias that emerges when censored VAR models (the traditional approach) are employed to capture asymmetries.We found that the pass-through of commodities prices to domestic prices has been strengthened in magnitude and statistical significance over time. Before the nineties, the pass-through was weak and statistically not different from zero, but from the first half of that decade there is evidence of a significant increase.For moderate commodities price changes (4 or less standard deviations), the magnitudes of the responses of domestic prices to positive and negative shocks do not statistically differ. Only when commodities prices are severely shocked (10 standard deviations) we found sign asymmetries in the pass-through which, contrary to popular belief, indicates a bigger response to negative price changes. Commodities price volatility does not condition this conclusion, sign asymmetries are the same in periods of high and low volatility.At a microeconomic level, we found evidence of positive sign asymmetries in some industries, especially those associated with commodities such as wheat (bakery products and pasta), corn (chicken meat), iron, rice and fertilizers. Related with this finding, we conclude that low degree of market competition is associated with a higher positive asymmetries.As a policy implication we recommend that the competition authority review in depth the industrial organization structure and business practices of dominant companies of those markets for which we found evidence of positive asymmetries in the pass-through of commodities prices changes together with high degree of concentration of suppliers.
- Estimación de una función de producción para Costa Rica: periodo 1991Q1-2006Q4This paper estimates a Cobb-Douglas production function with constant returns of scale for the Costa Rican economy. The sample of quarterly data is 1991Q1-2006Q4 and the econometric methodology applied was Dynamic Ordinary Least Squares. According with the results, it is not possible to reject the null hypothesis of constant returns of scale and the product’s elasticity to changes in capital stock and labor are 0.35 and 0.65 respectively. Based on this parameters and the long run utilization level of the production inputs, a series of potential output was estimated being its average annual growth 4.4%.
- Estimación del producto potencial para Costa Rica: periodo 1991-2006This paper shows a range of methodologies to estimate the potential output that have not been explored for the Costa Rican economy, additionally we improve others that have been already tried. We also offer statistical criteria to evaluate the forecast capacity of inflation of the different measures of output gap. Among the main results we have that most of the non-structural measures of output gap outperform structural ones such as production function and structural VAR in statistical significance and forecast capacity in a context of a forward looking Phillips Curve. In addition, the empirical evidence allows us to conclude that the output gap is a better indicator of demand pressures than the rate of growth of the observed GDP.
- Hipótesis de racionalidad y modelo de formación de expectativas de inflación en Costa RicaThis paper tests whether inflation expectations collected through polls by the Central Bank behave in accordance to the Rational Expectation Hypothesis (REH). A set of test that have not been applied to Costa Rican data are carried out under alternative assumptions about the stationarity properties of the series involved. If there is evidence of cointegration, Phillips-Hansen (1990) Fully Modified Least Squares (FMLS) technique is used for achieving robustness in hypothesis testing. Three series of inflation expectations are subject to examination, two of them quarterly collected (one year and a quarter ahead expectation) and a monthly one-year-ahead expectation series. Analyzed data does not support the REH in either case. The document also fits an equation of inflation expectations with standardized variables by using the generalized method of moments. Such equation allows the ranking of variables according to how much influence they have on inflation expectations. The deviation of inflation target from actual inflation has the higher impact, followed by the target itself and imported inflation in terms of domestic currency.
- Inversión en infraestructura y crecimiento económico, relevancia de factores institucionalesThe paper aims to quantify the effect of infrastructure investment on economic growth and to test if that effect is conditioned by factors of institutional nature. Dynamic panel data models with instrumental variables are estimated using generalized method of moments as in Calderón y Servén (2002) prolonging the data in both temporal and cross sectional dimensions while controlling for institutional factors. The results are in line with those reported by previous studies in terms of the magnitude of the effect of infrastructure investment on economic growth. Additionally, evidence suggests that bad institutions lessen the potential expansive effect of infrastructure investment. Finally, we find that Latin American countries would be restraining the expansive potential of their infrastructure investment by showing unfavorable institutional performance. The same would be happening with mid and low income countries.
- Medias truncadas del IPC como indicadores de inflación subyacente en Costa RicaThis study presents an evaluation of trimmed-mean inflation series calculated from Costa Rican data following the methodology of Bryan, Cecchetti and Wiggins (1997) and of Roger (1997), which entails the calculations of trimmed-means centered in an estimator of the population mean percentile. It was found that the historical distribution of price changes in Costa Rica is highly leptokurtic and right-skewed, the mean percentile being estimated at percentile 60. Trimmed-mean series were calculated by centering on the percentiles 50 to 70 and by using trimming percentages from 0% to 49%. In order to choose a trimmed-mean indicator for core inflation, the series obtained were evaluated through unbiasedness tests, forecasting ability tests and indicators of adequacy of fit to a measure of trend inflation. Most unbiased series were found to be centered around the estimated mean percentile. The series resulting from centering on the mean percentile (60) and trimming 30% of the weight on the left of the distribution and 10% on its right presents the best fit to the trend among the group of 24 unbiased series that showed the highest forecasting ability. This trimmed-mean series fits better to the trend inflation than an exclusion measure currently in use, the ISI, and its variability is lower.
- Performance of Artificial Neural Networks in Forecasting Costa Rican InflationThe underlying processes that generate economic series such as inflation, unemployment or output gaps are potentially quite complex. Undoubtedly that makes it very difficult to forecast them and has traditionally bent attention to relatively simple linear approaches when trying to model them. Trying to capture nonlinear relationships among inflation and its determinants, this paper applies Artificial Neural Networks (ANN) to forecast Costa Rican inflation. An innovative technique that systematically discriminates among different networks in order to overcome the problem of “over-fitting” an ANN was applied. Forecasts are compared with those obtained from “thick” models and traditional linear techniques. The potentially complex nonlinear relationships between inflation and its short run determinants in an expectations-augmented Phillips Curve scheme are captured with a systematically chosen ANN. Forecasts at different horizons are computed in a rolling exercise in order to test the hypothesis of a better performance of the nonlinear parameterization. Evidence shows that linear techniques do not outperform ANN and, in the case of a Phillips Curve, networks forecasts statistically improve upon linear approaches especially for short run forecast horizons. In most cases, “thick” modeled ANN’s forecasts showed a weak performance compared with systematically chosen ANNs.
- Policy Rate Pass-Through: Evidence From the Costa Rican EconomyThis paper examines the pass-through of the policy interest rate for the Costa Rican economy in the period 1996-2007. By estimating a non-linear asymmetric vector error correction model we found evidence supporting the hypothesis of a complete pass-through in the long run. Results also show that since the introduction of the administrated band exchange rate system (October 2006) banks react faster in the short run to movements of policy rate. Evidence does not favor the hypothesis that in the short run banks react differently to policy rate movements depending on whether such changes are positive or negative, in other words, there is no evidence of an asymmetric reaction of retail interest rates to movements of policy rate. On average, loan and deposit rates take 9.4 and 5 months respectively to fully pass a shock of policy rate. These average times are reduced to 3.5 and 2 towards the end of the sample. Private Banks pass a larger portion of any given movement of policy rate than State owned ones, but take more time to fully do so. Such results, by signaling a smoother transmission mechanism of the monetary policies, denote an encouraging environment to the process of migrating to an inflation targeting monetary regime.
- Transmisión de la tasa de política monetaria a los mercados de dinero en Costa RicaI quantify the policy rate pass-through to the two money markets that operate in Costa Rica (MIL and MEDI) so it can be assessed whether the pass-through differ among those markets. To that end I employ Structural Vector Autoregression models based upon which Granger causality tests and impulse-response functions are estimated. I found evidence that shocks to policy rate have significant and fast impact on the interest rate of the MIL market. This is not the case of the MEDI market for which I was not able to find evidence that its interest rate reacts to TPM shocks. Such results support the implementation of policy actions that help to integrate the two money markets so that monetary policy transmission in enhanced.
- Trimmed Means of the CPI as an Indicator of Core Inflation for Costa RicaThis study presents an evaluation of trimmed-mean inflation series calculated from Costa Rican data following the methodology of Bryan, Cecchetti and Wiggins (1997) and of Roger (1997), which entails the calculations of trimmed means centered in an estimator of the population mean percentile. It was found that the historical distribution of price changes in Costa Rica is highly leptokurtic and right-skewed, the mean percentile being estimated at percentile 60th. Trimmed-mean series were calculated by centering on the percentiles 50th to 70th and by using trimming percentages from 0% to 49%. In order to choose a trimmed-mean indicator for core inflation, the series obtained were evaluated through unbiasedness tests, forecasting ability tests and indicators of adequacy of fit to a measure of trend inflation. Most unbiased series were found to be centered around the estimated mean percentile. The series resulting from centering on the mean percentile (60th) and trimming 30% of the weight on the left of the distribution and 10% on its right presents the best fit to the trend among the group of 24 unbiased series that showed the highest forecasting ability. This trimmed-mean series fits better to the trend inflation than an exclusion measure currently in use (the ISI, for its Spanish acronym), and its variability is lower.