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Do Latin American Central Bankers Behave Non-Linearly?: The Experiences of Brazil, Chile, Colombia and Mexico

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  • Luiz de Mello
  • Diego Moccero
  • Matteo Mogliani

Abstract

This papers estimates unrestricted monetary reaction functions for four Latin American countries (Brazil, Chile, Colombia and Mexico) and tests for the presence of non-linear effects in central bank behaviour. The analysis covers the post-1999 inflation-targeting period. We deal with the presence of unit roots in the data by estimating the policy rules in a co-integration setting. We test for linear and non-linear co-integration among the variables of interest. The results suggest that a non-linear specification is not rejected by the data for Brazil, Colombia and Mexico, but it is for Chile. Estimation of smooth-transition models by NLLS and EN-NLLS suggests that the central bank’s response to the inflation gap (i.e. deviations of expected inflation from the target) is invariant across policy regimes in Colombia. It becomes stronger in Mexico as expected inflation deviates from the target. Policy responses appear to weaken in Brazil as the inflation gap widens, a finding that most probably reflects a history of adverse supply shocks and upward adjustments in targets in the early years of inflation targeting. Non-linearity is also found in the central bank’s response to the exchange rate in Brazil and Colombia. Les banques centrales d'Amérique latine se comportent-elles d'une manière non-linéaire? : Les expériences du Brésil, du Chili, de la Colombie et du Mexique Ce document estime des fonctions de réaction monétaires non-contraintes pour quatre pays d’Amérique latine (Brésil, Chili, Colombie et Mexique) et teste l’existence d’effets non-linéaires dans le comportement des banques centrales. L’analyse couvre la période post-1999 où la politique monétaire se caractérise par le ciblage d’inflation. Nous traitons la question de la présence de racines unitaires dans les données en estimant les règles de politique monétaire dans un cadre de cointégration. Nous testons l’existence d’une cointégration linéaire et non-linéaire de nos variables d’intérêt. Les résultats suggèrent que la spécification non-linéaire ne peut être rejetée pour les données brésiliennes, colombiennes et mexicaines ; elle l’est en revanche dans le cas du Chili. L’estimation de modèles de transition douce par des NLLS et EN-NLLS suggère que la réponse de la banque centrale à la différence entre l’inflation espérée et la cible d’inflation ne change pas selon le régime de politique monétaire au Chili. Elle se durcit au Mexique lorsque l’inflation espérée s’éloigne de la cible. Les réponses semblent s'assouplir au Brésil lorsque la différence entre l’inflation espérée et la cible d’inflation s’accroît ; ce résultat est certainement dû à des chocs d’offre négatifs et à des ajustements à la hausse des cibles dans les premières années de politique monétaire à cible d’inflation. Nous trouvons aussi un effet non-linéaire de la réponse de la Banque centrale au taux de change au Brésil et en Colombie.

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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 679.

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Date of creation: 06 Mar 2009
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Handle: RePEc:oec:ecoaaa:679-en

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Keywords: inflation targeting; smooth-transition model; reaction function; non-linear co-integration; modèle de transition douce; co-intégration multiple; fonction de réaction; cible d'inflation;

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Cited by:
  1. Sánchez-Fung, José R., 2011. "Estimating monetary policy reaction functions for emerging market economies: The case of Brazil," Economic Modelling, Elsevier, Elsevier, vol. 28(4), pages 1730-1738, July.
  2. Stefano Puddu, 2013. "Real Sector and Banking System: Real and Feedback Effects. A Non-Linear VAR Approach," IRENE Working Papers, IRENE Institute of Economic Research 13-01, IRENE Institute of Economic Research.

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