Inflation Targeting in Latin America
In this paper we analyze the implementation of inflation targeting in Brazil, Chile, Colombia and Peru. First we undertake OLS estimations of conventional Taylor rules and show that in all four countries the central bank increases its repo rate of interest in response to increases in the output gap...
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ir-11445-3272017-06-17T18:12:52Z Inflation Targeting in Latin America Barajas, Adolfo Steiner, Roberto Villar, Leonardo Pabón, César Inflación América Latina Inflation Targeting Markov Switching Taylor Rules In this paper we analyze the implementation of inflation targeting in Brazil, Chile, Colombia and Peru. First we undertake OLS estimations of conventional Taylor rules and show that in all four countries the central bank increases its repo rate of interest in response to increases in the output gap and, except in the case of Peru, also to deviations of inflation expectations from established targets. Second, using a Markov-Switching methodology that allows the data to speak for itself , we find that in Chile, Colombia and Peru there is evidence that, in the presence of severe external financial shocks, central banks temporarily abandoned their conventional reaction function. Third, we expand the conventional Taylor Rule so as to include variables related to exchange rate misalignments and to developments in domestic credit markets. We argue that this inclusion is merited on account of the potential for these variables to anticipate episodes of financial fragility, not because they might contribute to explain output and/or inflation gaps. Interestingly, there is only limited evidence that the countries in our study have actually used some form of expanded or integrated inflation targeting framework. In this paper we analyze the implementation of inflation targeting in Brazil, Chile, Colombia and Peru. First we undertake OLS estimations of conventional Taylor rules and show that in all four countries the central bank increases its repo rate of interest in response to increases in the output gap and, except in the case of Peru, also to deviations of inflation expectations from established targets. Second, using a Markov-Switching methodology that allows the data to speak for itself , we find that in Chile, Colombia and Peru there is evidence that, in the presence of severe external financial shocks, central banks temporarily abandoned their conventional reaction function. Third, we expand the conventional Taylor Rule so as to include variables related to exchange rate misalignments and to developments in domestic credit markets. We argue that this inclusion is merited on account of the potential for these variables to anticipate episodes of financial fragility, not because they might contribute to explain output and/or inflation gaps. Interestingly, there is only limited evidence that the countries in our study have actually used some form of expanded or integrated inflation targeting framework. BID E31 E52 E61 2015-12-10T12:16:07Z 2016-01-21T02:39:10Z 2017-04-18T21:15:22Z 2017-06-17T18:12:52Z 2015-12-10T12:16:07Z 2016-01-21T02:39:10Z 2017-04-18T21:15:22Z 2017-06-17T18:12:52Z 2013-12 http://hdl.handle.net/11445/327 application/pdf |
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Inflación América Latina Inflation Targeting Markov Switching Taylor Rules |
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Inflación América Latina Inflation Targeting Markov Switching Taylor Rules Barajas, Adolfo Steiner, Roberto Villar, Leonardo Pabón, César Inflation Targeting in Latin America |
description |
In this paper we analyze the implementation of inflation targeting in Brazil, Chile, Colombia and Peru. First we undertake OLS estimations of conventional Taylor rules and show that in all four countries the central bank increases its repo rate of interest in response to increases in the output gap and, except in the case of Peru, also to deviations of inflation expectations from established targets. Second, using a Markov-Switching methodology that allows the data to speak for itself , we find that in Chile, Colombia and Peru there is evidence that, in the presence of severe external financial shocks, central banks temporarily abandoned their conventional reaction function. Third, we expand the conventional Taylor Rule so as to include variables related to exchange rate misalignments and to developments in domestic credit markets. We argue that this inclusion is merited on account of the potential for these variables to anticipate episodes of financial fragility, not because they might contribute to explain output and/or inflation gaps. Interestingly, there is only limited evidence that the countries in our study have actually used some form of expanded or integrated inflation targeting framework. |
author |
Barajas, Adolfo Steiner, Roberto Villar, Leonardo Pabón, César |
author_facet |
Barajas, Adolfo Steiner, Roberto Villar, Leonardo Pabón, César |
author_sort |
Barajas, Adolfo |
title |
Inflation Targeting in Latin America |
title_short |
Inflation Targeting in Latin America |
title_full |
Inflation Targeting in Latin America |
title_fullStr |
Inflation Targeting in Latin America |
title_full_unstemmed |
Inflation Targeting in Latin America |
title_sort |
inflation targeting in latin america |
publishDate |
2015 |
url |
http://hdl.handle.net/11445/327 |
_version_ |
1626722003196051456 |
score |
12,131701 |