Anchoring of Inflation Expectations in Large Emerging Economies

We investigate through a time-varying trend inflation model the anchoring of the inflation process in the five largest emerging economies: Brazil, Russia, India, China and South Africa (also known as the BRICS countries) since 1990s. Our analysis is based on a non-centered unobserved components stochastic volatility model of inflation. We decompose inflation into a permanent stochastic trend and a transitory (inflation gap) component. By analyzing the time-varying volatility of the trend shocks, we show about the changes in the degree of anchoring of inflation expectations over time. The level and variability of trend inflation shows the dominance of trend component in the inflation process in all these emerging economies except India. By undertaking Bayesian model comparison, we show that the inflation process in these economies is time-varying. Thus by adding stochastic volatility we find a better fit for the inflation process