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Inflation Targeting in Latin America

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Author Info

  • Adolfo Barajas
  • Roberto Steiner
  • Leonardo Villar
  • Cesar Pabon

Abstract

Estimation of conventional Taylor rules for Brazil, Chile, Colombia and Peru shows that central banks increase their repo rate in response to increases in the output gap and, except in Peru, to deviations of inflation expectations from target. Using a Markov-Switching methodology, it is found that, in the presence of external shocks, Chile, Colombia and Peru temporarily abandoned their conventional reaction function. The Taylor Rule is expanded and variables are included related to exchange rate misalignments and to domestic credit developments; limited evidence is found that countries have used some form of integrated inflation targeting. There is strong evidence that intervention in F/X markets is determined by exchange rate misalignments rather than by exchange rate volatility and that most countries seem particularly concerned with a strong currency. Central banks appear to have pursued an inflation objective using a standard Taylor rule and an exchange rate objective through interventions in the F/X market.

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Bibliographic Info

Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number IDB-WP-473.

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Date of creation: Jan 2014
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Handle: RePEc:idb:wpaper:idb-wp-473

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  1. Mehrotra, Aaron & Sánchez-Fung, José R., 2011. "Assessing McCallum and Taylor rules in a cross-section of emerging market economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(2), pages 207-228, April.
  2. Matías Tapia & Andrea Tokman, 2003. "Efectos de las intervenciones en el mercado cambiario: el caso de Chile," Estudios de Economia, University of Chile, Department of Economics, vol. 30(1 Year 20), pages 21-53, June.
  3. Litterman, Robert B, 1983. "A Random Walk, Markov Model for the Distribution of Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 1(2), pages 169-73, April.
  4. Piti Disyatat, 2005. "Inflation Targeting, Asset Prices, and Financial Imbalances: Conceptualizing the Debate," Working Papers 2005-09, Economic Research Department, Bank of Thailand.
  5. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
  6. Adolfo Barajas & Lennart Erickson & Roberto Steiner, 2008. "Fear of Declaring: Do Markets Care What Countries Say About Their Exchange Rate Policies?," IMF Staff Papers, Palgrave Macmillan, vol. 55(3), pages 445-480, July.
  7. de Mello, Luiz & Moccero, Diego, 2011. "Monetary policy and macroeconomic stability in Latin America: The cases of Brazil, Chile, Colombia and Mexico," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 229-245, February.
  8. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2012. "Is Inflation Targeting Still On Target?," NBER Working Papers 18570, National Bureau of Economic Research, Inc.
  9. Michael Woodford, 2012. "Inflation Targeting and Financial Stability," NBER Working Papers 17967, National Bureau of Economic Research, Inc.
  10. Leyva, Gustavo, 2008. "Reglas de política monetaria para Chile y Perú: Evidencia de inestabilidad en los parámetros," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 15, pages 21-42.
  11. Carvalho, Alexandre & Moura, Marcelo L., 2008. "What Can Taylor Rules Say About Monetary Policy in Latin America?," Insper Working Papers wpe_126, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  12. John B. Taylor, 2001. "The Role of the Exchange Rate in Monetary-Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 263-267, May.
  13. Leon, David & Quispe, Zenon, 2010. "El encaje como instrumento no convencional de Política Monetaria," Revista Moneda, Banco Central de Reserva del Perú, issue 143, pages 8-16.
  14. Assenmacher-Wesche, Katrin, 2006. "Estimating Central Banks' preferences from a time-varying empirical reaction function," European Economic Review, Elsevier, vol. 50(8), pages 1951-1974, November.
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