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An indicator of monetary bias for emerging and dollarized economies The case of Uruguay

Author

Listed:
  • Conrado Brum Civelli

    (Banco Central del Uruguay
    Universidad Complutense de Madrid
    Universidad de la República)

  • Alfredo García-Hiernaux

    (Universidad Complutense de Madrid)

Abstract

The instability of the relationships between interest rates, amount of money, and exchange rate, and the transmission problems between different interest rates hinder the measurement of monetary policy through a single variable. This difficulty is particularly relevant in emerging and dollarized economies. This paper proposes a multivariate indicator of monetary bias for these economies in which the monetary and financial variables are considered according to the impact they have on inflation in each period. We analyze the case of Uruguay and use a Factor Augmented Vector Autoregressive Moving Average model with exogenous variables (FAVARMAX) to estimate these effects. Using the evolution of the indicator proposed, called the Monetary Conditions Index (MCI), we characterize the policy adopted by the Central Bank of Uruguay between 2010-2019, a period of inflation targeting.

Suggested Citation

  • Conrado Brum Civelli & Alfredo García-Hiernaux, 2020. "An indicator of monetary bias for emerging and dollarized economies The case of Uruguay," Documentos de trabajo 2020007, Banco Central del Uruguay.
    • Handle: RePEc:bku:doctra:2020007
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    File URL: https://www.bcu.gub.uy/Estadisticas-e-Indicadores/Documentos%20de%20Trabajo/7.2020.pdf
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    More about this item

    Keywords

    monetary policy bias; multivariate Indicator; Inflation; FAVARMAX;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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