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RMPresentation2023 (1).pdf

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César Sobrino
César Sobrino

This document outlines a study examining the sources of inflation in Puerto Rico using a structural VAR analysis. It includes motivation for the study from Puerto Rico's historically higher inflation volatility compared to the US. The goal is to examine the role of external and domestic shocks on headline and group-level inflation. The methodology employs a Blanchard-Quah identification scheme. Key outcomes show domestic demand shocks are the most important source of inflation changes, while federal transfers and oil prices also influence fluctuations. Conclusions discuss limitations and implications for monetary policy effectiveness.

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The Sources of Inflation in Puerto Rico: A Structural VAR Analysis César R. Sobrino, Ph.D. 1Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus 2XX Encuentro de Investigación- UAGM 04/21/2023 César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 1 / 18
Outline 1 Motivation 2 Goal 3 Literature Review 4 Methodology Data Variable Definitions 5 Outcomes 6 Conclusions César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 2 / 18
Motivation Motivation Persistent high inflation for most economies. In 2022, double-digit inflation in almost half the world (CEPAL (2022) & Kryvtsov et al. (2023) & Ball et al. (2022)) After declaring the COVID-19 pandemic: Supply chain crisis: Internal and external (China) causes Food shortages Russian invasion of Ukraine in 2022 Higher prices in wheat, vegetable oils, etc. Central Banks apply tight monetary policies to stabilize inflation. (Lindé et al. (2023)) César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 3 / 18
Motivation Motivation From 1984 - 2021, the volatility of inflation in Puerto Rico has been higher than that of the US. Puerto Rico United States Mean 1.83% 2.68% Standard deviation 1.96% 1.24% Coefficient of variation 106.86% 46.23% Puerto Rico, a US territory, is affected by external shocks such as the Federal Reserve policy rate, federal transfers, oil prices, and the Merchant Act. César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 4 / 18
Motivation Motivation Source: Institute of Statistics of Puerto Rico $ Federal Reserve of St. Louis (own elaboration) César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 5 / 18
Motivation Motivation César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 6 / 18
Motivation Questions What is the importance of the Federal Reserve monetary policy on the inflation rate and inflation per group? What is the role of the US federal transfers on the inflation rate and inflation per group? What is the role of the oil price on the inflation rate and inflation per group? What is the role of output growth in PR on the inflation rate and inflation per group? What is the role of domestic demand in PR on the inflation rate and inflation per group? César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 7 / 18
Goal Goal The goal of this study is to examine the role of external and domestic shocks on the inflation rate (headline) and on the inflation of each group To run this analysis is employed a structural VAR, including long-run restrictions Forecast error variance decomposition César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 8 / 18
Literature Review Previous Empirical Literature Le & Pfau (2009) The effects of monetary policy on inflation in Vietnam Kelesbayev et al. (2022) The effects of the oil price shock on inflation: The Case of Kazakhstan Balatti (2020) small and large advanced open economies are exposed to global fluctuations to a comparable extent Michail et al. (2022) the relationship between inflation and shipping costs. Following a shock in freight rates, the most hard-hit sectors appear to be garments and major household appliances. (Euro Area) Carrière-Swallow et al. (2023) Shipping Costs and Inflation (sample of 46 countries). 1% increase in global shipping costs increases domestic inflation by about 0.15 %, over 12 months César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 9 / 18
Methodology Methodology 1 To run our analysis, we set the following reduced VAR specification 2 Using a Blanchard & Quah (1988)’ specification, I identify 5 structural shocks: Domestic (Puerto Rico) Permanent shock to the inflation rate (demand shock). The only shock which is temporary to the real GDP growth rate. Permanent shock to the real GDP growth rate (supply shock) External Permanent shock to the Federal Reserve Policy Rate Permanent shock to the Oil Price Permenent shock to the US Federal Transfers César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 10 / 18
Methodology Data Data Quarterly data from 1985:01 to 2022:01 We collect the consumer price index for all groups and per group from the Statistical Institute of PR The Planning Board of Puerto Rico provides the and real GDP and the US Federal Transfers Federal Reserve of St Louis web page provides the Federal Reserve Policy Rate, the Federal Funds Rate, and the West Texas Intermediate Crude Oil Price César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 11 / 18
Methodology Variable Definitions Variable Definitions Headline Inflation (Percent Change of Consumer Price Index (all groups (8)) Groups Apparel: women, men, kids, etc. Education and communication: tuition, child care centers, stamps, other post office services, etc. Food: beef, poultry, sea food, fresh vegetables, fresh fruits, elaborated fruits and vegetables, baked goods, beverages, etc. Medical care: prescription and nonprescription drugs, vaccines, laboratory, hospital expenses, medical expenses, health insurance, etc. Transportation: car price, car maintenance, fuel, car insurance, public transportation, etc. Housing: rent, utilities, furniture, etc. Entertainment: services, sport implements, pets and pet goods, books, magazines, etc. Others: personal care goods personal care services, etc. César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 12 / 18
Outcomes Outcomes: Headline Inflation TABLE I: Forecast Error Variance Decomposition (%) Quarters Policy Federal Oil Supply Demand Rate Transfers Headline Inflation 1 0.0 31.3 27.0 0.1 41.6 2 1.1 29.4 29.3 0.2 40.1 3 2.7 31.4 26.1 1.2 38.6 4 4.7 30.8 24.1 1.8 38.6 5 8.5 29.6 23.1 1.8 36.9 10 13.8 28.0 19.5 7.9 30.7 15 18.6 29.1 17.7 7.8 26.8 20 18.6 28.8 17.9 7.9 26.8 César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 13 / 18
Outcomes Outcomes: Groups- Average over 20 quarters TABLE II: Forecast Error Variance Decomposition (%) Policy Federal Oil Supply Demand Rate Transfers Food 13.3 26.2 5.6 1.1 53.8 Medical Care 6.1 9.1 17.0 18.9 48.8 Housing 4.4 13.8 5.2 6.4 70.2 Education 9.4 15.9 9.8 20.4 44.4 Transportation 4.5 19.5 17.4 2.8 55.8 Entertainment 8.1 16.0 29.7 37.1 9.2 Apparel 6.7 1.2 15.2 16.7 60.3 Other 6.2 18.2 22.8 9.9 42.9 César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 14 / 18
Outcomes Outcomes: Summary The most important source of inflation changes is the demand shocks Federal transfers and oil price shocks play a secondary role in inflation variations The domestic demand shocks are also the most important source for all groups but Entertainment The oil price shock plays a bigger role in Entertainment and Others groups Across groups, the Fed monetary policy, and the Federal Transfers are most important in the Food Group César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 15 / 18
Conclusions Conclusions After the COVID-19 surge, the main source of inflation was a supply-side crisis Puerto Rico, the main source of inflation changes is the demand shock External shocks such as federal transfers and oil price shocks are important in inflation fluctuations Fed monetary policy shocks play a small role in inflation variations. Ineffective monetary policy? Limitation: Shipping costs are not included (The Merchant Marine Act of 1920 ) César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 16 / 18
Conclusions References I Balatti, M. (2020). Inflation volatility in small and large advanced open economies. Ball, L. M., Leigh, D., & Mishra, P. (2022). Understanding US Inflation During the COVID Era. Technical report, National Bureau of Economic Research. Carrière-Swallow, Y., Deb, P., Furceri, D., Jimenez, D., & Ostry, J. D. (2023). Shipping costs and inflation. Journal of International Money and Finance, 130, 102771. CEPAL, N. (2022). United states economic outlook: Inflation trends post covid-19. Kelesbayev, D., Myrzabekkyzy, K., Bolganbayev, A., & Baimaganbetov, S. (2022). The effects of the oil price shock on inflation: the case of kazakhstan. International Journal of Energy Economics and Policy, 12(3), 477–481. César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 17 / 18
Conclusions References II Kryvtsov, O., MacGee, J. J., & Uzeda, L. (2023). The 2021–22 Surge in Inflation. Technical report, Bank of Canada. Le, H. V. & Pfau, W. D. (2009). A vector autoregression (var) analysis of the monetary transmission mechanism in vietnam. Mimeo (National Graduate Institute for Policy Studies, Vietnam). Lindé, J., Trabandt, M., & Harding, M. (2023). Understanding Post-COVID Inflation Dynamics. Technical report, International Monetary Fund. Michail, N. A., Melas, K. D., & Cleanthous, L. (2022). The relationship between shipping freight rates and inflation in the euro area. International Economics, 172, 40–49. César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 18 / 18

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RMPresentation2023 (1).pdf

  • 1. The Sources of Inflation in Puerto Rico: A Structural VAR Analysis César R. Sobrino, Ph.D. 1Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus 2XX Encuentro de Investigación- UAGM 04/21/2023 César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 1 / 18
  • 2. Outline 1 Motivation 2 Goal 3 Literature Review 4 Methodology Data Variable Definitions 5 Outcomes 6 Conclusions César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 2 / 18
  • 3. Motivation Motivation Persistent high inflation for most economies. In 2022, double-digit inflation in almost half the world (CEPAL (2022) & Kryvtsov et al. (2023) & Ball et al. (2022)) After declaring the COVID-19 pandemic: Supply chain crisis: Internal and external (China) causes Food shortages Russian invasion of Ukraine in 2022 Higher prices in wheat, vegetable oils, etc. Central Banks apply tight monetary policies to stabilize inflation. (Lindé et al. (2023)) César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 3 / 18
  • 4. Motivation Motivation From 1984 - 2021, the volatility of inflation in Puerto Rico has been higher than that of the US. Puerto Rico United States Mean 1.83% 2.68% Standard deviation 1.96% 1.24% Coefficient of variation 106.86% 46.23% Puerto Rico, a US territory, is affected by external shocks such as the Federal Reserve policy rate, federal transfers, oil prices, and the Merchant Act. César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 4 / 18
  • 5. Motivation Motivation Source: Institute of Statistics of Puerto Rico $ Federal Reserve of St. Louis (own elaboration) César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 5 / 18
  • 6. Motivation Motivation César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 6 / 18
  • 7. Motivation Questions What is the importance of the Federal Reserve monetary policy on the inflation rate and inflation per group? What is the role of the US federal transfers on the inflation rate and inflation per group? What is the role of the oil price on the inflation rate and inflation per group? What is the role of output growth in PR on the inflation rate and inflation per group? What is the role of domestic demand in PR on the inflation rate and inflation per group? César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 7 / 18
  • 8. Goal Goal The goal of this study is to examine the role of external and domestic shocks on the inflation rate (headline) and on the inflation of each group To run this analysis is employed a structural VAR, including long-run restrictions Forecast error variance decomposition César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 8 / 18
  • 9. Literature Review Previous Empirical Literature Le & Pfau (2009) The effects of monetary policy on inflation in Vietnam Kelesbayev et al. (2022) The effects of the oil price shock on inflation: The Case of Kazakhstan Balatti (2020) small and large advanced open economies are exposed to global fluctuations to a comparable extent Michail et al. (2022) the relationship between inflation and shipping costs. Following a shock in freight rates, the most hard-hit sectors appear to be garments and major household appliances. (Euro Area) Carrière-Swallow et al. (2023) Shipping Costs and Inflation (sample of 46 countries). 1% increase in global shipping costs increases domestic inflation by about 0.15 %, over 12 months César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 9 / 18
  • 10. Methodology Methodology 1 To run our analysis, we set the following reduced VAR specification 2 Using a Blanchard & Quah (1988)’ specification, I identify 5 structural shocks: Domestic (Puerto Rico) Permanent shock to the inflation rate (demand shock). The only shock which is temporary to the real GDP growth rate. Permanent shock to the real GDP growth rate (supply shock) External Permanent shock to the Federal Reserve Policy Rate Permanent shock to the Oil Price Permenent shock to the US Federal Transfers César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 10 / 18
  • 11. Methodology Data Data Quarterly data from 1985:01 to 2022:01 We collect the consumer price index for all groups and per group from the Statistical Institute of PR The Planning Board of Puerto Rico provides the and real GDP and the US Federal Transfers Federal Reserve of St Louis web page provides the Federal Reserve Policy Rate, the Federal Funds Rate, and the West Texas Intermediate Crude Oil Price César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 11 / 18
  • 12. Methodology Variable Definitions Variable Definitions Headline Inflation (Percent Change of Consumer Price Index (all groups (8)) Groups Apparel: women, men, kids, etc. Education and communication: tuition, child care centers, stamps, other post office services, etc. Food: beef, poultry, sea food, fresh vegetables, fresh fruits, elaborated fruits and vegetables, baked goods, beverages, etc. Medical care: prescription and nonprescription drugs, vaccines, laboratory, hospital expenses, medical expenses, health insurance, etc. Transportation: car price, car maintenance, fuel, car insurance, public transportation, etc. Housing: rent, utilities, furniture, etc. Entertainment: services, sport implements, pets and pet goods, books, magazines, etc. Others: personal care goods personal care services, etc. César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 12 / 18
  • 13. Outcomes Outcomes: Headline Inflation TABLE I: Forecast Error Variance Decomposition (%) Quarters Policy Federal Oil Supply Demand Rate Transfers Headline Inflation 1 0.0 31.3 27.0 0.1 41.6 2 1.1 29.4 29.3 0.2 40.1 3 2.7 31.4 26.1 1.2 38.6 4 4.7 30.8 24.1 1.8 38.6 5 8.5 29.6 23.1 1.8 36.9 10 13.8 28.0 19.5 7.9 30.7 15 18.6 29.1 17.7 7.8 26.8 20 18.6 28.8 17.9 7.9 26.8 César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 13 / 18
  • 14. Outcomes Outcomes: Groups- Average over 20 quarters TABLE II: Forecast Error Variance Decomposition (%) Policy Federal Oil Supply Demand Rate Transfers Food 13.3 26.2 5.6 1.1 53.8 Medical Care 6.1 9.1 17.0 18.9 48.8 Housing 4.4 13.8 5.2 6.4 70.2 Education 9.4 15.9 9.8 20.4 44.4 Transportation 4.5 19.5 17.4 2.8 55.8 Entertainment 8.1 16.0 29.7 37.1 9.2 Apparel 6.7 1.2 15.2 16.7 60.3 Other 6.2 18.2 22.8 9.9 42.9 César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 14 / 18
  • 15. Outcomes Outcomes: Summary The most important source of inflation changes is the demand shocks Federal transfers and oil price shocks play a secondary role in inflation variations The domestic demand shocks are also the most important source for all groups but Entertainment The oil price shock plays a bigger role in Entertainment and Others groups Across groups, the Fed monetary policy, and the Federal Transfers are most important in the Food Group César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 15 / 18
  • 16. Conclusions Conclusions After the COVID-19 surge, the main source of inflation was a supply-side crisis Puerto Rico, the main source of inflation changes is the demand shock External shocks such as federal transfers and oil price shocks are important in inflation fluctuations Fed monetary policy shocks play a small role in inflation variations. Ineffective monetary policy? Limitation: Shipping costs are not included (The Merchant Marine Act of 1920 ) César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 16 / 18
  • 17. Conclusions References I Balatti, M. (2020). Inflation volatility in small and large advanced open economies. Ball, L. M., Leigh, D., & Mishra, P. (2022). Understanding US Inflation During the COVID Era. Technical report, National Bureau of Economic Research. Carrière-Swallow, Y., Deb, P., Furceri, D., Jimenez, D., & Ostry, J. D. (2023). Shipping costs and inflation. Journal of International Money and Finance, 130, 102771. CEPAL, N. (2022). United states economic outlook: Inflation trends post covid-19. Kelesbayev, D., Myrzabekkyzy, K., Bolganbayev, A., & Baimaganbetov, S. (2022). The effects of the oil price shock on inflation: the case of kazakhstan. International Journal of Energy Economics and Policy, 12(3), 477–481. César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 17 / 18
  • 18. Conclusions References II Kryvtsov, O., MacGee, J. J., & Uzeda, L. (2023). The 2021–22 Surge in Inflation. Technical report, Bank of Canada. Le, H. V. & Pfau, W. D. (2009). A vector autoregression (var) analysis of the monetary transmission mechanism in vietnam. Mimeo (National Graduate Institute for Policy Studies, Vietnam). Lindé, J., Trabandt, M., & Harding, M. (2023). Understanding Post-COVID Inflation Dynamics. Technical report, International Monetary Fund. Michail, N. A., Melas, K. D., & Cleanthous, L. (2022). The relationship between shipping freight rates and inflation in the euro area. International Economics, 172, 40–49. César R. Sobrino, Ph.D. ( Division of Business, Tourism & Entreprenuership- UAGM, Gurabo Campus, XX Enc The Sources of Inflation in Puerto Rico: A Structural VAR Analys 04/21/2023 18 / 18