Toward a “New” Inflation-Targeting Framework: The Case of Uruguay

Martin Gonzalez-Rozada, Matías Escudero () and Martin Sola

Economía Journal, 2014, vol. Volume 15 Number 1, issue Fall 2014, 89-131

Abstract: Using a dynamic stochastic general equilibrium model with financial frictions we study the effects of a rule that incorporates not only the interest rate but also the legal reserve requirements as instruments of the monetary policy. We evaluate the effectiveness of both instruments to accomplish the inflationary and/or financial stability objectives of the Central Bank of Uruguay. The main findings are that: (i) reserve requirements can be used to achieve the inflationary objectives of the Central Bank. However, reducing inflation using this instrument, it also produces a real appreciation of the Uruguayan peso; (ii) when the Central Bank uses the monetary policy rate as an instrument, the effect of the reserve requirements is to contribute to reduce the negative impact over consumption, investment and output of an eventual increase in this rate. Nevertheless, the quantitative results in terms of inflation reduction are rather poor; and (iii) the monetary policy rate becomes more effective to reduce inflation when the reserve requirement instrument is solely directed to achieve financial stability and the monetary policy rate used to achieve the inflationary target. Overall, the main policy conclusion of the paper is that having a non-conventional policy instrument, when well-targeted, can help effectively inflation control. Moving reserve requirements can also be instrumental in offsetting the impact of monetary policy on the real exchange rate.

Keywords: Inflation Targeting; Latin America; Uruguay; Monetary Policy; Central Bank; exchange rate (search for similar items in EconPapers)
Date: 2014
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Related works:
Working Paper: Toward a “new” inflation-targeting framework: the case of Uruguay (2014)
Working Paper: Towards a "New" Inflation Targeting Framework: The Case of Uruguay (2014)
Working Paper: Towards a “New” Inflation Targeting Framework: The Case of Uruguay (2014)
Working Paper: Towards a “New” Inflation Targeting Framework: The Case of Uruguay (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000425:012280

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