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Inflation in Barbados is mainly imported. But how are external shocks transmitted to the domestic economy? Shouldn’t there be also a domestic component, albeit very small, given the presence of capital controls? We focus on short term dynamics and contribute to the existing literature in three ways: (i) we identify the process with which inflation expectations are likely to be formed in Barbados; (ii) we add forward looking inflation expectations as one of the main channels through which external monetary shocks are transmitted to the economy; and (iii) we measure the importance of domestic shocks. We find that due to the peg, forward-looking inflation expectations in the reserve currency country are an important component of the inflation expectation process in Barbados and that they are a key channel in the international monetary transmission mechanism. Domestic factors, mainly monetary shocks, also matter given the limited degree of monetary autonomy provided by capital controls.

Exports and Imports --- Inflation --- Macroeconomics --- Price Level --- Deflation --- Central Banks and Their Policies --- International Finance: General --- Open Economy Macroeconomics --- Energy: Demand and Supply --- Prices --- Agriculture: Aggregate Supply and Demand Analysis --- Empirical Studies of Trade --- International economics --- Oil prices --- Import prices --- Food prices --- Terms of trade --- International trade --- Imports --- Economic policy --- nternational cooperation --- Barbados --- Nternational cooperation