OECD Economics Department Working Papers
Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.
The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.
- Forthcoming titles
- ISSN: 18151973 (online)
- https://doi.org/10.1787/18151973
Monetary Policy and Inflation Expectations in Latin America
Long-run Effects and Volatility Spillovers
The current monetary policy framework in several Latin American countries, combining inflation targeting and
a floating exchange-rate regime, has contributed to disinflation by anchoring expectations around low, stable
levels. This paper uses co-integration analysis to estimate simultaneously a monetary reaction function and the
determinants of expected inflation for Brazil, Chile, Colombia and Mexico in the post-1999 period. It also tests
for the presence of volatility spillovers between the monetary stance and inflation expectations based on
M-GARCH modelling. The results of the empirical analysis show that: i) there are long-term relationships
between the interest rate, expected inflation and the inflation target, suggesting that monetary policy has been
conducted in a forward-looking manner and helped anchor inflation expectations in the countries under
examination, and ii) greater volatility in the monetary stance leads to higher volatility in expected inflation in
Brazil, Colombia and Mexico, suggesting that interest-rate smoothing contributes to reducing inflation
expectations volatility. No volatility spillover effect was detected in the case of Chile.
Keywords: M-GARCH modelling, volatility spillover, Mexico, Brazil, Colombia, multiple co-integration, inflation target, Chile
JEL:
E52: Macroeconomics and Monetary Economics / Monetary Policy, Central Banking, and the Supply of Money and Credit / Monetary Policy;
O54: Economic Development, Innovation, Technological Change, and Growth / Economywide Country Studies / Economywide Country Studies: Latin America; Caribbean;
C22: Mathematical and Quantitative Methods / Single Equation Models; Single Variables / Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
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