Latin America's non-linear response to pandemic inflation

Rafael Guerra, Steven Kamin, John Kearns, Christian Upper and Aatman Vakil

No 1209, BIS Working Papers from Bank for International Settlements

Abstract: This paper estimates empirical Taylor rules to analyze the recent monetary policy of the five main Latin American inflation-targeting central banks. We find that during the inflationary surge of 2021–23, monetary policy reacted more strongly and more quickly to changes in inflation than predicted by a standard linear Taylor rule, estimated on data from the pre-pandemic period. Although this appears to represent a shift in the monetary reaction function, we think it more likely that Latin American central banks have been following a non-linear strategy, responding more aggressively to inflation, the higher it rose. We confirmed this by adding the square of inflation to the Taylor rule model: its coefficient was positive and significant, indicating that policy interest rates exhibited a non-linear response to inflation, even during the pre-pandemic period, and the model did a better job of predicting the sharp rise in interest rates during 2021–23.

Keywords: Latin America; central banks; monetary policy; Covid-19; interest rates (search for similar items in EconPapers)
JEL-codes: E50 E52 E58 (search for similar items in EconPapers)
Date: 2024-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ipr and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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