Unveiling the objectives of central banks: Tales of four Latin American countries

Marcos Gómez, Juan Pablo Medina, Gonzalo Valenzuela

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

We estimate the stabilization objectives of four Latin American countries that have implemented a flexible inflation targeting regime recently: Brazil, Chile, Colombia and Peru. In doing so, we develop a New Keynesian dynamic stochastic general equilibrium model for these economies and estimate their structural parameters through Bayesian methods. To infer the stabilization objectives in each country, we assume that central banks set monetary policy optimally. Our main results highlight that the central banks in these four countries have a high preference for stabilizing inflation, but do not have the systematic objective of stabilizing the exchange rate. This result is robust to assuming either commitment or discretion in the optimal policy. Also, in contrast to the case of commitment, assuming discretion in the optimal monetary policy increases the preference for interest rate smoothing, making it comparable to a preference for inflation stabilization. Finally, except for the case of Peru, the monetary policy under discretion has a better empirical fit in these countries than the one under commitment.

Original languageEnglish
Pages (from-to)81-100
Number of pages20
JournalEconomic Modelling
Volume76
DOIs
StatePublished - Jan 2019

Keywords

  • Bayesian estimation
  • Central bank preferences
  • Emerging economies
  • Flexible inflation targeting
  • Optimal monetary policy

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