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Unveiling the objectives of central banks: Tales of four Latin American countries

Marcos Gómez (), Juan Medina () and Gonzalo Valenzuela

Economic Modelling, 2019, vol. 76, issue C, 81-100

Abstract: We estimate the stabilization objectives of four Latin American countries that have implemented a flexible inflation targeting regime recently: Brazil, Chile, Colombia and Peru. In doing so, we develop a New Keynesian dynamic stochastic general equilibrium model for these economies and estimate their structural parameters through Bayesian methods. To infer the stabilization objectives in each country, we assume that central banks set monetary policy optimally. Our main results highlight that the central banks in these four countries have a high preference for stabilizing inflation, but do not have the systematic objective of stabilizing the exchange rate. This result is robust to assuming either commitment or discretion in the optimal policy. Also, in contrast to the case of commitment, assuming discretion in the optimal monetary policy increases the preference for interest rate smoothing, making it comparable to a preference for inflation stabilization. Finally, except for the case of Peru, the monetary policy under discretion has a better empirical fit in these countries than the one under commitment.

Keywords: Emerging economies; Flexible inflation targeting; Central bank preferences; Optimal monetary policy; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C51 E52 F41 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.econmod.2018.07.024

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