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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Autores Principales: Barajas, Adolfo, Steiner, Roberto, Villar, Leonardo, Pabón, César
Publicado: 2015
Materias:
Acceso en línea:http://hdl.handle.net/11445/327
id ir-11445-327
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spelling 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
institution Fedesarrollo
collection DSpace
topic Inflación
América Latina
Inflation Targeting
Markov Switching
Taylor Rules
spellingShingle 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
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score 9,175058