Monetary Policy Independence under Flexible Exchange Rates: An Illusion?

Sebastian Edwards

No 20893, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: I analyze whether countries with flexible exchange rates are able to pursue an independent monetary policy, as suggested by traditional theory. I use data for three Latin American countries with flexible exchange rates, inflation targeting, and capital mobility – Chile, Colombia and Mexico – to investigate the extent to which Federal Reserve actions are translated into local central banks’ policy rates. The results indicate that there is significant “policy contagion,” and that these countries tend to “import” Fed policies. The degree of monetary policy independence is lower than what traditional models suggest.

JEL-codes: E5 E52 E58 F30 F31 F32 (search for similar items in EconPapers)
Date: 2015-01
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-lam, nep-mac and nep-opm
Note: IFM
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Citations: View citations in EconPapers (57)

Published as Sebastian Edwards, 2015. "Monetary Policy Independence under Flexible Exchange Rates: An Illusion?," The World Economy, vol 38(5), pages 773-787.

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