Inflation bias in Latin America

André Sanchez Pacheco and Paulo Sérgio Tenani

No 425, Textos para discussão from FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil)

Abstract: This paper accesses the presence of inflation bias in major Latin American Economies over the past decade. Using a small-scale New Keynesian DSGE model and Bayesian Techniques, the time-varying neutral rate of interest is estimated for major Latin American economies. Then the deviations in the policy rate from the neutral rate are overlapped with deviations in current inflation from target. This simple procedure allows the identification of three different regimes of monetary policy – too easy, too restrictive and appropriate. The main result is that Latin American Central Banks often set monetary policy too easy. Analogously, the same conclusion is found if one compares the policy rate with a Taylor Rule-based interest rate aimed at the center of the inflation target range. Such analysis provides evidence of inflation bias in the region, with the exception of Chile.

Date: 2016
New Economics Papers: this item is included in nep-dge, nep-lam, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:eesptd:425

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