Dealing with cost-push inflation in Latin America: multi-causality in a context of increased openness and commodity price volatility*

Abstract

Despite recognizing the exogenous, cost-push nature of recent inflationary pressures in Latin America, plus the difficulties faced by monetary authorities in dealing, under such circumstances, with internal and external disequilibria simultaneously, intellectual attention in policy circles remains focused on demand-side issues and policy instruments. This paper develops an eclectic model that has the potential to nest demand-side elements, but focuses on cost-push factors -distributional conflict and propagation mechanisms -as typically addressed by the post-Keynesian-structuralist tradition. In addition to shedding some light on the nature of inflationary pressures as experienced in Latin American countries during the recent commodity boom -in particular South American commodity exporting economies -the paper's main goal is to portray the policy and instrumental trade-offs faced by policy-makers themselves. By bringing unconventional policy devices into the model (such as direct interventions in commodity markets), we hope to broaden the scope of the conventional macroeconomic policy instruments.

Introduction to Monetary Policy Challenges in Latin America

“…Bastian and Setterfield (2020) present a post-Keynesian-Structuralist (PK-S) theoretical model in a structural form that identifies how conflicting claims give place to either an equilibrium regime with a low inflation rate or a disequilibrium regime with a high and increasing inflation rate. In a similar vein, Abeles and Panigo (2015) propose a theoretical PK-S model that focuses on cost-push factors (i.e., the international commodities market). The formal contribution of this model is identifying the political and institutional factors, such as particular structural characteristics that explain the different speed and magnitude of the pass-through from the international prices of exported commodities to inflation rates in the case of small open developing economies, such as the LACs.…”

Nominal exchange rate shocks and inflation in an open economy: towards a structuralist inflation targeting agenda

“…One possible explanation is tight monetary policy in response to external shocks. As Abeles and Panigo (2015) observe in the context of an international commodity shock, conventional wisdom recommends to prevent second-round inflationary effects following such a context shock, meaning adopting contractionary monetary policy to cool off the economic activity and thus keep wage demands under control (Abeles & Panigo, 2015: 519;522). Another possible explanation is the very neoliberal labour market reforms that have been spread in the developing world from the late 1980s on, which have reduced the capacity of workers to resist real wage losses due to inflation rises stemming from inflationary shocks.…”

“…In this paper, and for the sake of simplicity, we focus on nominal exchange shocks as the source of external disturbances. For a model wherein the main trigger of inflation is a positive commodity price shock, seeAbeles and Panigo (2015).5 This observation draws attention to the fact that not all exogenous shocks are created equal: the moments of the distributions of the exogenous shocks that afflict the nominal exchange rates of, for example, the US and Brazil may be (and in all likelihood, are) explicable in terms of structural characteristics of the economies themselves. We exploit this claim in section 4 when we discuss the susceptibility of open economies to permanent inflationary consequences of temporary nominal exchange shocks, and how this might be addressed.…”

Bancos centrales “periféricos”: el caso de América Latina

“…El modelo desarrollado en esta sección se basa en un trabajo anterior (Abeles y Panigo, 2015). Se construye sobre la base del supuesto simplificador de que el precio internacional de los productos básicos, la demanda agregada y el producto interno bruto (PIB) son variables exógenas, como se plantea en buena parte de la literatura estructuralista 14 .…”

“…El presente capítulo está basado fundamentalmente en una versión publicada en Review of Keynesian Economics(Abeles y Panigo, 2015). Los autores agradecen a la editorial y a los editores la autorización para utilizarla en este capítulo.…”