Monetary Policy and the Current Account in Latin America: Revisiting the Mundellian Paradigm

Juan Camilo Laborde Vera
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Juan Camilo Laborde Vera: Universidad de los Andes

No 2026-15, Documentos CEDE from Universidad de los Andes, Facultad de Economía, CEDE

Abstract: How does the current account respond to a monetary policy shock? The answer to this perennial question is theoretically ambiguous and empirical evidence is particularly scarce in emerging markets due to challenges in identifying exogenous policy variation. I construct a novel dataset of monetary policy shocks using analysts’ forecasts of policy rate decisions for an unbalanced panel of five emerging market economies in Latin America during 1999-2024. I estimate impulse response functions using local projections and find that a monetary tightening shock leads to a “J curve” pattern in the current account: a short-run contraction followed by a medium-run expansion. The response is heterogeneous in the cross-section and depends on the strength of the exchange rate appreciation resulting from the monetary contraction and the country’s export-import structure. The panel estimation results show that exports and imports exhibit a hump-shaped pattern and decline by 4.5 and 5.9 per cent, respectively, as a result of a one-percentage-point policy tightening shock. The results are robust to using alternative measures of high-frequency monetary shocks.

Keywords: Monetary Policy; Local Projections; Monetary Policy Shocks; Current Account Adjustment; International Macroeconomics (search for similar items in EconPapers)
JEL-codes: E52 F32 F41 (search for similar items in EconPapers)
Pages: 73
Date: 2026-03
New Economics Papers: this item is included in nep-cba, nep-lam, nep-mon and nep-opm
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