TRADE PARTNERS INFLATION AS A BENCHMARK FOR SETTING THE INFLATION TARGET IN COSTA RICA

In this working paper we present a measure of trade partner's inflation which can serve as a benchmark for setting the long term inflation target by the authorities of the Central Bank of Costa Rica. This metric is constructed by weighting the Consumer Price Indexes of the main trading partners based on the relative importance of each partner in total trade with Costa Rica. Since the success of the Inflation Targeting monetary regimen depends crucially on the ability of the Central Bank to anchor inflation expectations to the long term inflation target, we consider that a target of 3%, which is equal to the average of the inflation rate for the trading partner's between years 2000 and 2012, will allow the BCCR to fulfill its goals of low and stable inflation rate.