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What do Latin American inflation targeters care about? A comparative Bayesian estimation of central bank preferences

Stephen McKnight (), Alexander Mihailov () and Antonio Pompa Rangel

Journal of Macroeconomics, 2020, vol. 63, issue C

Abstract: This paper employs Bayesian estimation to uncover the central bank preferences of the five Latin American inflation targeting countries with floating exchange rates: Brazil, Chile, Colombia, Mexico, and Peru. The target weights of each country’s central bank loss function are estimated using a medium-scale small open economy New Keynesian model with imperfect exchange-rate pass-through under either complete or incomplete international asset markets. Bayesian model comparison selects: (i) unambiguously the complete markets model version; (ii) the model specification with explicit concern for real exchange rate stabilization, with the exception of Peru. Our results suggest that the central banks of Mexico and Peru are closest to following a strict inflation targeting regime, whereas Brazil, Chile, and Colombia also assign a sizeable weight to output gap and real exchange rate stabilization. Finally, the estimated preference weights for each central bank are shown to credibly reflect their legal mandates.

Keywords: Bayesian model comparison; International asset market structure; Central bank preferences; Inflation targeting; Latin America; Small open economies (search for similar items in EconPapers)
JEL-codes: C51 E52 F41 (search for similar items in EconPapers)
Date: 2020
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Working Paper: What do Latin American inflation targeters care about? A comparative Bayesian estimation of central bank preferences (2016) Downloads
Working Paper: What Do Latin American Inflation Targeters Care About? A Comparative Bayesian Estimation of Central Bank Preferences (2016) Downloads
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DOI: 10.1016/j.jmacro.2019.103188

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