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


  • OECD


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.

Suggested Citation

  • Oecd, 2006. "Monetary Policy and Inflation Expectations in Latin America: Long-run Effects and Volatility Spillovers," OECD Economics Department Working Papers 518, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:518-en

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    Cited by:

    1. Roman Horváth & Jakub Matějů, 2011. "How Are Inflation Targets Set?," International Finance, Wiley Blackwell, vol. 14(2), pages 265-300, June.
    2. Jean-Yves Gnabo & Luiz de Mello & Diego Moccero, 2010. "Interdependencies between Monetary Policy and Foreign Exchange Interventions under Inflation Targeting: The Case of Brazil and the Czech Republic," International Finance, Wiley Blackwell, vol. 13(2), pages 195-221, August.
    3. 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, vol. 58(09-10), pages 482-492, December.
    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, number 01 edited by Katerina Smidkova, July.

    More about this item


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

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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