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Effects of fiscal credibility on inflation expectations: evidence from an emerging economy
Juan Camilo AnzoáteguiZapata*
Juan Camilo GalvisCiro*
Juan Camilo GalvisCiro
Affiliation: Universidad Pontificia Bolivariana, Department of Economics, Medellin, Colombia
000000016680275X
Article  Year: 2021  Pages: 125  148  Volume: 45  Issue: 1 Received: July 16, 2020  Accepted: November 10, 2020  Published online: March 9, 2021

FULL ARTICLE
FIGURES & DATA
REFERENCES
CROSSMARK POLICY
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Source: Author´s elaboration. Data from the Central Bank of Colombia. Trend calculated with the HodrickPrescott filter.
Source: Author´s elaboration. Data from the Central Bank of Colombia.
Source: Author´s elaboration. Data from the Central Bank of Colombia.
Source: Author's elaboration. Data from the Central Bank of Colombia.

OLS

GMMHAC

Dependent variable: E(π)

Model (1)

Model (2)

Model (3)

Model (4)

Model (5)

Model (1)

Model (2)

Model (3)

Model (4)

Model (5)

Constant

0.8989***
(0.2031)
[4.4248]

0.0362
(0.2488)
[0.1455]

0.6253**
(0.2608)
[2.3970]

0.9408***
(0.2767)
[3.3991]

0.6288**
(0.3236)
[1.9629]

0.9959***
(0.2499)
[3.9840]

0.3482**
(0.1554)
[2.2405]

0.6309***
(0.1903)
[3.3140]

0.9878***
(0.1745)
[5.6591]

1.0719***
(0.3441)
[3.1124]

E(π_{t1})

0.6092***
(0.0851)
[7.1545]

0.8396***
(0.0593)
[14.1422]

0.3724***
(0.1189)
[3.1319]

0.8238***
(0.0504)
[16.3314]

0.4751***
(0.1174)
[4.0448]

0.5825***
(0.1077)
[5.4078]

0.7714***
(0.0450)
[17.1204]

0.3668***
(0.0840)
[4.3202]

0.7946***
(0.0366)
[21.7099]

0.4685***
(0.0597)
[7.8414]

CRED LOSS_{t}

0.1054**
(0.0412)
[2.5584]

0.1133**
(0.0478)
[2.4474]

0.0947**
(0.0402)
[2.3528]

0.1269***
(0.0436)
[2.9071]

0.0915**
(0.0411)
[2.2243]

0.1052***
(0.0371)
[2.8319]

0.0959***
(0.0317)
[3.0221]

0.0972**
(0.0458)
[2.1210]

0.1213***
(0.0312)
[3.8856]

0.0994***
(0.0249)
[3.9793]

VIX_{t1}

0.0001
(0.0038)
[0.0315]

0.0033
(0.0044)
[0.7421]

0.0040
(0.0036)
[1.1140]

0.0047
(0.0038)
[1.2400]

0.0017
(0.0037)
[0.4600]

0.0003
(0.0021)
[0.1541]

0.0044
(0.0042)
[1.0539]

0.0022
(0.0029)
[0.7648]

0.0057**
(0.0026)
[2.1536]

0.0004
(0.0024)
[0.1691]

π_{t1}

0.0979***
(0.0277)
[3.5290]


0.1677***
(0.0397)
[4.2245]


0.1334***
(0.0408)
[3.2657]

0.1053***
(0.0312)
[3.3666]


0.1600***
(0.0252)
[6.3330]


0.1405***
(0.0178)
[7.8799]

e_{t1}


0.0001**
(6.60E05)
[2.0913]


0.0003**
(0.0001)
[1.9674]

0.0002*
(0.0001)
[1.9534]


9.84E05*
(5.66E05)
[1.7388]


0.0005**
(0.0002)
[2.2540]

0.0001*
(6.63E05)
[1.9117]

y_{t1}

4.2515*
(2.3130)
[1.8380]

5.2183**
(2.6785)
[1.9681]



5.2481**
(2.3384)
[2.2442]

3.3457***
(0.9125)
[3.6661]

5.6147***
(1.4500)
[3.8720]



3.6543***
(0.9729)
[3.7558]

U_{t1}



0.0969**
(0.0427)
[2.2690]

0.0503*
(0.0289)
[1.7391]

0.1257**
(0.0608)
[2.1095]



0.0962**
(0.0440)
[2.3806]

0.0472***
(0.0185)
[2.5415]

0.0989***
(0.0347)
[2.8453]

D_{t}

0.8585***
(0.1993)
[4.3064]

0.2435
(0.2559)
[0.9517]

0.8723***
(0.1858)
[4.6937]

0.9731***
(0.2023)
[4.8087]

0.9283***
(0.1967)
[4.7174]

0.9354**
(0.3533)
[2.6475]

0.2069
(0.3345)
[0.6163]

0.7943***
(0.2019)
[3.5744]

1.0797***
(0.3648)
[3.3984]

1.1167***
(0.3112)
[3.5882]

R^{2}_{adj}

0.91

0.87

0.92

0.91

0.92

0.91

0.85

0.89

0.89

0.91

Fstatistic

87.05

65.83

107.59

97.42

35.57






Prob(FStat)

0.00

0.00

0.00

0.00

0.00






LM Test (1)

0.93

1.39

2.04

1.37

21.51






pvalue (LM Test)

0.40

0.25

0.14

0.26

0.00






BreuschPaganGodfrey test

0.60

0.96

0.67

1.39

1.79






pvalue (BPG test)

0.72

0.46

0.66

0.23

0.14






Jstatistic






4.87

5.21

2.39

8.50

3.79

Prob(Jstat)






0.56

0.39

0.66

0.20

0.70

Instruments






13

12

11

13

15

N. Instr./N. Obs.






0.20

0.19

0.17

0.20

0.23

Note: Marginal significance levels: (***) denotes 0.01, (**) denotes 0.05, and (*) denotes 0.10. Standard errors are in parentheses and tstatistics in brackets. P(Fstatistic) report the respective pvalue of the Ftest. P(Jstatistic) report the respective pvalued of the Jtest. The list of GMM instruments are presented in table A6 (appendix).
Source: Author´s elaboration. Data from the Central Bank of Colombia.
Variable

Variable description

Data source

E(π)

Inflation expectations
computed by the Central Bank of Colombia. Inflation expectations are 1 year
forward. The survey is called Macroeconomic Projections of Local and Foreign
Analysts Data in %.

Central Bank of
Colombia

CRED LOSS

Credibility. The
indicator was constructed with the difference between the observed deficit
and the expected deficit.

Devised by
authors.


DEF

Fiscal deficit observed
by the Central National Government (% GDP)  Accumulated in the last 4
quarters. Data in %.

Central Bank of
Colombia


E(DEF)

Fiscal deficit
expectations (% GDP). Expectations come from central bank surveys. The
forecasting deficit is the overall fiscal deficit. The survey is called
Macroeconomic Projections of Local and Foreign Analysts. Data in %

Central Bank of
Colombia


π

Inflation
accumulated in 12 months measured by the variation of the consumer price
index.
Data in %.

Central Bank of
Colombia


e

Exchange rate
(month average) of the Colombian peso / United States dollar.

Central Bank of
Colombia


y

Gross domestic
product. Series was built on real Colombian currency with constant prices
from 2005. The variable is seasonally adjusted by the central bank. In the
models, the series was used in natural logarithm.

Central Bank of
Colombia


U

Unemployment
rate with seasonal adjustment X12. Data in %.

Central Bank of
Colombia


VIX

Volatility of
the stock market index S&P 500.

Federal Reserve
of St. Louis


D

A dummy
variable. The dummy takes a value of 1 for year 2008 and 0 for the rest.

Devised by
authors.


Variable

Mean

Min.

Max.

SD.

E(π)

3.9455

2.8766

5.6900

0.7804

DEF

3.0272

1.2166

4.6816

0.8691

E(DEF)

2.4996

0.6500

4.0800

0.9183

CRED LOSS

0.9798

0.0200

3.1400

0.7920

π

4.3057

1.8464

8.2436

1.6576

e

2,360.02

1,762.14

3,462.01

495.15

U

10.6105

8.4389

14.2076

1.3231

y

12.0552

11.7126

12.3205

0.1811

VIX

18.1577

9.5100

44.1400

7.7106

Note: E(π), DEF, E(DEF), CRED LOSS, π and U were used in %.
Series

ADF

PP

KPSS

Lags

Esp.

Test

C.V (1%)

Banda

Esp.

Test

C.V (1%)

Banda

Esp.

Test

C.V (5%)

E(π)

1

C

2.44

3.54

3

N

1.28

2.60

4

C, T

0.16

0.14

CRED LOSS

2

N

1.16

2.60

1

N

1.61

2.60

5

C, T

0.15

0.14

π

1

C

3.15

3.56

3

N

1.06

2.60

3

C, T

0.16

0.14

e

0

N

0.65

2.60

1

N

0.53

2.60

6

C, T

0.23

0.14

U

0

C

2.86

3.55

3

C

2.86

3.55

5

C

0.84

0.46

y

0

C, T

1.75

4.11

4

C, T

1.59

4.13

6

C

1.00

0.46

VIX

0

C

3.61

3.54

1

C

3.49

3.54

5

C, T

0.15

0.14

Note: C.V., critical value. Trend (T) and intercept (I) are included based on Schwarz criterion. ADF – the final choice of lag was made based on Schwarz criterion. PP and KPSS – spectral estimation method is Bartlett kernel and the NeweyWest Bandwidth is used.
Lag

Schwarz

Lag

Schwarz

Equation
(4)


Equation (5)


0

8.81

0

14.31

1

1.50*

1

6.74*

2

2.08

2

7.56

Equation
(6)


Equation (7)


0

2.95

0

19.57

1

3.75*

1

13.45*

2

3.07

2

14.70

Note: * denotes the lag order selection.
Data Trend:

None

None

Linear

Linear

Quadratic

Test type

No
intercept
No trend

Intercept
No Trend

Intercept
No trend

Intercept
trend

Intercept
trend

Equation (4) trace

2

3

2

2

3

Equation (5) trace

2

2

2

2

3

Equation (6) trace

1

1

2

2

3

Equation (7) trace

1

1

1

1

2

Johansen’s cointegration test

Hyp. N. of CE (s)

Eigen
value

Trace
statistic

Critical
value (0.05)

pvalue.

Equation (4)





R=0

0.50

96.73

69.81

0.00

R≤1**

0.46

60.18

47.85

0.00

R=2

0.31

27.34

29.79

0.09

Equation (5)





R=0

0.62

116.19

76.97

0.00

R≤1**

0.50

65.87

54.07

0.00

R=2

0.27

29.77

35.19

0.17

Equation (6)





R=0**

0.56

95.52

76.97

0.00

R≤1

0.35

52.48

54.07

0.06

Equation (7)





R=0**

0.62

109.60

88.80

0.00

R≤1

0.42

59.65

63.87

0.10

Note: *Model selected by the Schwarz criterion. Values based on Mackinnon. **Denotes the null hypothesis rejection at 5%.
Model 1

E(π)_{t2},
E(π)_{t3}, CRED LOSS_{t}₋₂, CRED LOSS_{t}₋_{3},
π_{t2}, π_{t3}, y_{t}₋_{4}, y_{t}₋_{5},
VIX_{t}₋_{2}, VIX_{t}₋_{3}, VIX_{t}₋_{4},
D_{t1}

Model 2

E(π)_{t2},
E(π)_{t3}, CRED LOSS_{t}₋₂, e_{t3}, e_{t4},
y_{t}₋_{3}, y_{t}₋_{4}, VIX_{t}₋₂,
VIX_{t}₋_{3} VIX_{t}₋_{4, }D_{t1}

Model 3

E(π)_{t2},
E(π)_{t3}, E(π)_{t4}, CRED LOSS_{t}₋₂, CRED LOSS_{t}₋_{3},
π_{t2, }π_{t3}, U_{t}₋₂, VIX_{t}₋₂, D_{t1}

Model 4

E(π)_{t2},
E(π)_{t3}, E(π)_{t4, }CRED LOSS_{t}₋₂, CRED LOSS_{t}₋_{3},
e_{t2}, e_{t3}, U_{t}₋_{2}, U_{t}₋_{3},
U_{t}₋_{4}, VIX_{t}₋₂, D_{t1}

Model 5

E(π)_{t2},
E(π)_{t3, }CRED LOSS_{t}₋₂, CRED LOSS_{t}₋_{3},
e_{t2}, e_{t3}, y_{t}₋_{4}, y_{t}₋_{5},
U_{t}₋_{2}, U_{t}₋_{3}, VIX_{t}₋₂, π_{t2},_{
}π_{t3},_{ }D_{t1}

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