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Monetary Policy and Inflation Expectations in Latin America: Long-run Effects and Volatility Spillovers

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    Abstract

    The current monetary policy framework in several Latin American countries, combining inflation targeting and a floating exchange-rate regime, has contributed to disinflation by anchoring expectations around low, stable levels. This paper uses co-integration analysis to estimate simultaneously a monetary reaction function and the determinants of expected inflation for Brazil, Chile, Colombia and Mexico in the post-1999 period. It also tests for the presence of volatility spillovers between the monetary stance and inflation expectations based on M-GARCH modelling. The results of the empirical analysis show that: i) there are long-term relationships between the interest rate, expected inflation and the inflation target, suggesting that monetary policy has been conducted in a forward-looking manner and helped anchor inflation expectations in the countries under examination, and ii) greater volatility in the monetary stance leads to higher volatility in expected inflation in Brazil, Colombia and Mexico, suggesting that interest-rate smoothing contributes to reducing inflation expectations volatility. No volatility spillover effect was detected in the case of Chile. Politique monétaire et anticipations d'inflation en Amérique latine : Effets à long terme et spillovers de volatilité Le cadre courant de la politique monétaire dans plusieurs pays d'Amérique latine, qui combine un ciblage d'inflation et un régime de taux de change flottant, a contribué à la désinflation par ancrage des anticipations d'inflation à un niveau bas et stable. Ce document utilise une analyse de co-intégration pour estimer simultanément une fonction de réaction da la politique monétaire et les déterminants des anticipations d'inflation pour le Brésil, le Chili, la Colombie et le Mexique depuis 1999. Des tests sont aussi présentés sur la présence d'effets de spillover de volatilité entre la politique monétaire et les anticipations d'inflation, en s'appuyant sur le modèle M-GARCH. Les résultats de l'analyse empirique montrent que : i) il existe des relations de long terme entre le taux d'intérêt, les anticipations d'inflation et la cible d'inflation. Cela suggère que la politique monétaire a été conduite selon une méthode prospective et a assuré l'ancrage des anticipations d'inflation; et ii) une plus grande volatilité de la politique monétaire entraîne une plus importante volatilité des anticipations d'inflation au Brésil, en Colombie et au Mexique, cela laisse penser qu'un lissage des taux d'intérêt contribue à une réduction de la volatilité des anticipations d'inflation. Aucun spillover de volatilité n'a été détecté dans le cas du Chili.

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    File URL: http://dx.doi.org/10.1787/416820683181
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    Bibliographic Info

    Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 518.

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    Date of creation: 04 Oct 2006
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    Handle: RePEc:oec:ecoaaa:518-en

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    Keywords: Mexico; Brazil; inflation target; Chile; Colombia; multiple co-integration; volatility spillover; M-GARCH modelling; co-intégration multiple; Mexique; spillover de volatilité; M-GARCH; Colombie; Chili; cible d'inflation; Brésil;

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    Cited by:
    1. Roman Horváth, 2008. "Undershooting of the Inflation Target in the Czech Republic: The Role of Inflation Expectations," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 58(09-10), pages 482-492, December.
    2. Roman Horvath & Jakub Mateju, 2010. "How Are Inflation Targets Set?," CERGE-EI Working Papers wp426, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
    3. Luiz de Mello & Diego Moccero & Jean-Yves Gnabo, 2008. "Interdependencies between Monetary policy and Foreign-Exchange Intervention under Inflation Targeting: The Case of Brazil and the Czech Republic," OECD Economics Department Working Papers 593, OECD Publishing.
    4. Juraj Antal & Zuzana Antonicova & Jan Babecky & Michal Hlavacek & Tomas Holub & Roman Horvath & Jarek Hurnik & Ondra Kamenik & Karel Musil & Jiri Podpiera & Lubos Ruzicka & Michal Skorepa & Katerina S, 2008. "Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, Czech National Bank, Research Department, number 01 edited by Katerina Smidkova, August.

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