Unconventional monetary policy in a high-inflation regime: evidence from Argentina

Tomás Baioni

No 4709, Asociación Argentina de Economía Política: Working Papers from Asociación Argentina de Economía Política

Abstract: Standard macroeconomic theory shows that a contractionary monetary policy reduces inflation. However, Argentina's recent history of active contractionary monetary policy stance and increasing inflation suggests otherwise. I construct monthly monetary policy shocks, first as deviations from the Central Bank's policy rule, following Romer & Romer (2004), and secondly as daily forward premium to overcome a potential "prize puzzle", following Witheridge (2024), to estimate the dynamic responses of inflation, economic growth and bilateral exchange rate to higher interest rates. Results from a SVAR model suggest that, as opposed to standard macroeconomic theory, a 10% hike in the monetary policy rate unequivocally increases headline inflation using both approaches. Furthermore and as robustness checks, I estimate the impulse response functions with an instrumental-variables local-projections approach (IV-LP), first, and I then compare my prior estimations with a "one-step" approach, following Lloyd & Manuel (2024), and find that my original conclusions hold. I theorize that this seemingly unconventional result is consistent with standard macroeconomic theory, when one accounts for a Central Bank with increasing interest-bearing liabilities as an active policy stance.

JEL-codes: E31 E52 G15 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2024-11
New Economics Papers: this item is included in nep-cba and nep-mon
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