The Effect of International Monetary Policy Expansions on Costa Rica

José Pablo Barquero () and Pedro Isaac Chávez López ()
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José Pablo Barquero: Bank of Costa Rica;
Pedro Isaac Chávez López: Centro de Estudios Monetarios Latinoamericanos (CEMLA)

Chapter 4 in International Spillovers of Monetary Policy, 2017, pp 73-108 from Centro de Estudios Monetarios Latinoamericanos, CEMLA

Abstract: This paper studies if the international monetary policy has a major effect on the Costa Rican economy. The analysis is performed estimating a structural Bayesian vector autoregression (SBVAR) and a dynamic stochastic general equilibrium (DSGE) small open economy model estimated with Bayesian maximum likelihood methods using data from 2000 to 2014. The SBVAR estimation provides evidence that shocks to us interest rates, us inflation and us output in conjunction accounts for the following share of fluctuations: 43.2%, of nominal exchange rates; 52.2% of Costa Rican interest rates; 35.1% of Costa Rican inflation; 51.4% of Costa Rican output; 36.7% of exports; and 39.3% of imports. The DSGE model describes the mechanisms through which the local and foreign disturbances affect Costa Rica. An unexpected increase in the local interest rates means that the holding of local assets by the rest of the world increases; and it also incentives savings, which means postponed consumption. Households substitute depsits, local and foreign currency, with government debt. As expected the substitution of savings by government debt means there is no greater investment in the economy due to an increase in the risk premium. Meanwhile, an unexpected expansion in the us interest rate causes an outflow of resources from the economy, which along with the interest rate increase causes a depreciation of the currency and an increase in the local interest rate. Therefore consumption decreases and exports increase.

Keywords: monetary policy; central banks; general equilibrium (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2017
Note: Joint Research Program XX Meeting of the Central Bank Researchers Network
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