Guatemala: Selected Issues

May2023 GUATEMALA SELECTISSUES IMFCountryReportNo.23/173 ThisSelectedIssuespaperonGuatemalawaspreparedbyastaffteamoftheInternationalMonetaryFundasbackgrounddocumentationfortheperiodicconsultationwiththemembercountry.ItisbasedoninformationavailableatthetimeitwascompletedonApril28,2023. TheIMF’stransparencypolicyallowsforthedeletionofmarket-sensitiveinformationandCopiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.orgPrice:$18.00perprintedcopy InternationalMonetaryFundWashington,D.C. ©2023InternationalMonetaryFund April28,2023 GUATEMALA SELECTEDISSUES PreparedByPreparedbyMariaA.Oliva,PaulaBeltran-Saavedra,AlexandreNguyen-Duong,GonzaloSalinas,RoziLamprakaki(allWHD),MetodijHadzi-Vaskov(RegionalResidentRepresentative),andLuisCarlosIbanezThomae(ResidentRepresentativeOffice).HeidiCanelasprovidedsupport. ApprovedBy WesternHemisphereDepartment CONTENTS INFLATIONINGUATEMALA:DETERMINANTS,RISKS,ANDEXPECTATIONS2 A.DeterminantsofInflationinGuatemala3 B.ARiskAssessmentofCoreInflationinGuatemala:AnAugmentedPhillipsCurve5 C.InflationExpectationsAmidInflationaryPressures8 References11 MONETARYPOLICYTRANSMISSIONINGUATEMALA:RESPONSEONOUTPUTANDPRICES12 A.StatisticalMethods13 B.MonetaryPolicyTransmission:KeyResults14 References16 EXCHANGERATEANDFOREIGNEXCHANGEINTERVENTIONSINGUATEMALA17 A.AReviewofGuatemala’sForeignExchangeDevelopmentstoDate18 B.MeasuringExchangeRateVolatilityinGuatemala27 ADDRESSINGGUATEMALA’SINFORMALITYCHALLENGE30 A.InformalityinNumbers30 B.Informality:CostsandDeterminants32References40 INFLATIONINGUATEMALA:DETERMINANTS,RISKS,ANDEXPECTATIONS1 1.Underthe2005InflationTargeting(IT)framework,Guatemalahasaccumulatedarecordofinflationstabilityandanchoredexpectationsinthepastyears.Guatemalahasalongtrackrecordofmacroeconomicstability,withheadlineinflationremainingsince2013withintherangeestablishedbytheCentralBank.TheITframeworkhelpedmaintainlowinflationandanchorexpectationsofdomesticagentsaroundthetarget(4.0+/-1percent).Fueledbyglobalinflationarypressures,Guatemala’sinflationhasbeenontherisesincemid-2022,firstdrivenbyexternalfactorsbutdomesticfactorscatchingupastimepassed.2In2022,inflation(averageandeop3)was6.9and9.2percent,respectively. 2.Inthiscontext,themonetaryauthoritydecidedtoincreasethemonetarypolicyrateby300basispointsina10-monthperiod.WiththeincreasestheCentralBanksentastrongmessageinitsdeterminationtofightinflation.Thissignalinghelpedinflationexpectationstoremainstillrelativelyanchored.HighuncertaintyintheexternalscenarioandhigherinflationlevelscouldposeachallengetokeepexpectationsanchoredinGuatemala.InflationexpectationsinGuatemalahaveanimportantadaptivecomponent,especiallyatshorterhorizons,albeitthesensitivitytoinflationdisturbanceshasbeendecreasingovertime. HeadlineInflation(InPercent)MonetaryPolicyRate(InPercent) 1PreparedbyMariaA.Oliva,PaulaBeltran-Saavedra,AlexNguyen-Duong,RoziLamprakaki,MetodijHadzi-Vaskov,andLuisCarlosIbanez. 2In2011,themonetaryauthorityreaffirmedthecommitmenttoreachamedium-terminflationtargetof4.0%+/-1percentagepointfrom2013.For2012,theinflationtargetwas4.5%+/-1percentagepoint. 3Endofperiod. 2INTERNATIONALMONETARYFUND 3.Thischaptercoversdeterminants,inflation-at-risk,andexpectations.Itanalyses (i)quantifytheroleofexternalanddomesticfactorsonthedynamicsofinflationinGuatemala.ItidentifiesimportedfactorsdrivinginflationdynamicsandestimatestheirimportanceforGuatemala; (ii)presentsariskassessmentofcoreinflationbyestimatingthedeterminantsofupsiderisksacrosscountries,focusingonGuatemala;and(iii)analyzesthebehaviorofinflationexpectationsunderahighinflationscenarioandinvestigatesthemainfactorsthatexplainIEoverthemediumterm. 4.Themainresultsofthechapterare:first,externalfactorsexplainedaround58percentofheadlineinflationinearly2022,buttheircontributionhasdeclinedto30percentinrecentmonths.Second,thedistributionofinflationhaswidened,withupsiderisksmainlydrivenbydomesticfactors.Third,themaindriversofinflationexpectationsinGuatemalaaredomesticandreflecthighermonetarypolicycredibility. A.DeterminantsofInflationinGuatemala 5.WhathasbeenthecontributionofexternalanddomesticfactorsintherecentincreaseinGuatemala’sheadlineinflation?TheanalysislooksintothecommonvariationacrossinflationratesforGuatemalaanditsmaintradepartners.4EstimatesofthecontributionofexternalfactorstoinflationinGuatemalaarestatisticallysignificantbutsmall.ExternalfactorscorrelatedtocommodityandenergypricesexplainedasizableshareofGuatemala’sheadlineinflationinearly2022.However,thecontributionhasdeclinedsignificantly,withmostlydomesticfactorsexpandingtheirweighing. 6.Theempiricalmodeldecomposestheevolutionoftheinflationrateintoexternalandidiosyncraticfactors.Thatis, 𝜋it=∑F 𝜆ƒ𝐹ƒ +𝜀it,(1) ˛ƒ=1i¸t Externalfactors t i t where𝜋itistheinflationrateincountry�andtime𝑡;𝜀itrepresentscountry�'sidiosyncraticfactor;and𝐹ƒisanexternalfactor�∈[1,2,⋯,𝐹]tobeestimated.Themodelallowsforh