Inflation and the variability of relative prices in the Caribbean: evidence from panel threshold models

This paper examines the impact of inflation and its variability for eight Caribbean countries; Antigua and Barbuda, Bahamas, Barbados, Dominica, Grenada, Jamaica, Saint Kitts and Nevis and Saint Vincent and the Grenadines. The paper goes beyond the standard approach to examine the variability of relative prices (VRP) within the context of a threshold effects framework, since it was recognized that whether inflation was low or very high was significant in determining its impact on an economy. The paper employed a panel threshold effects model to capture the non-linear nature of the relationship, which exists between inflation and its variability. The findings are that inflation variability is high at both low and high rates of inflation and that inflation targeting could have an upper-bound of at most 10% for the Caribbean. It was also found that such variability could even exist in a low inflation environment, which added to inflation uncertainty. Of course this conclusion is subject to the fact that there is considerable variation in inflation rates among countries in the Caribbean subregion and therefore policies to address inflation would have to be country specific.