The Impact on Exports (Central Bank of Argentina – BCRA)
May 2024
Authors: Jimena Calvo, Pablo de la Vega, Emiliano Libman, and Guido Zack.
Executive Summary
This paper analyzes the empirical relationship between inflation and its proximate determinants in Argentina using quarterly data for the period 2004–2022 and a Vector Error Correction Model (VECM) approach. Unlike previous studies, the analysis is grounded in a theoretical framework that motivates the inclusion of variables expected to explain inflation, thereby reducing the risk of omitting relevant factors and allowing key mechanisms to be formally modeled.
Inference is conducted through Granger causality tests, impulse-response functions, and forecast error variance decomposition. The results suggest that any anti-inflationary stabilization plan for Argentina should take into account both the strong relevance of inflation inertia, the exchange rate, and interest rates in driving short-run price dynamics, as well as the long-run relationship between prices, interest rates, and economic activity.
Key Findings
Inflation remains one of the most pressing challenges facing Argentina, reaching levels that severely constrain economic growth, income distribution improvements, and poverty reduction. However, significant disagreements persist regarding the main drivers of inflation and, consequently, the appropriate anti-inflationary policies.
This study contributes to the literature on the determinants of inflation in Argentina over the last two decades by employing quarterly data from 2004–2022 and a Vector Error Correction Model (VECM), which enables the analysis of both long-term relationships and short-term dynamics among simultaneously determined variables.
Unlike previous research, the paper starts from a theoretical framework that decomposes the price level into its proximate determinants and justifies the inclusion of multiple explanatory variables expected to influence inflation.
The main findings indicate that:
- Inflation has recessionary effects in the long run, negatively affecting economic activity over time.
- Interest rates—and, more broadly, monetary policy—appear to have limited direct effectiveness in reducing inflation. Increases in interest rates do not seem to lower inflation and may even contribute to higher inflation rates, except indirectly through their impact on the exchange rate.
- Inflation exhibits a high degree of inertia, meaning that past inflation strongly influences future inflation dynamics.
- Adjustments in regulated prices and utility tariffs are inflationary only in the short term.
- Changes in economic activity have limited explanatory power regarding the evolution of inflation.
These results suggest that any anti-inflationary strategy for Argentina should pay particular attention to the importance of inflation inertia, as well as the inflationary effects of interest rates, exchange rate movements, and regulated prices—including electricity and natural gas tariffs—in shaping short-run price dynamics.