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What Do Latin American Inflation Targeters Care About? A Comparative Bayesian Estimation of Central Bank Preferences

Author

Listed:
  • Stephen McKnight

    (Centro de Estudios Económicos, El Colegio de México)

  • Alexander Mihailov

    (Department of Economics, University of Reading)

  • Antonio Pompa Rangel

    (Dirección General de Investigación Económica, Banco de México)

Abstract
This paper uses Bayesian estimation techniques to uncover the central bank preferences of the big five Latin American inflation targeting countries: Brazil, Chile, Colombia, Mexico, and Peru. The target weights of each central bank's loss function are estimated using a medium-scale small open economy New Keynesian model with incomplete international asset markets and imperfect exchange-rate pass-through. Our results suggest that all central banks in the region place a high priority on stabilizing inflation and interest rate smoothing. While stabilizing the real exchange rate is a concern for all countries except Brazil, only Mexico is found to assign considerable weight to reducing real exchange rate fluctuations. Overall, Brazil, Colombia, and Peru show evidence of implementing a strict inflation targeting policy, whereas Chile and Mexico follow a more flexible policy by placing a sizeable weight to output gap stabilization. Finally, the posterior distributions for the central bank preference parameters are found to be strikingly different under complete asset markets. This highlights the sensitivity of Bayesian estimation, particularly when uncovering central bank preferences, to alternative international asset market structures.

Suggested Citation

  • Stephen McKnight & Alexander Mihailov & Antonio Pompa Rangel, 2016. "What Do Latin American Inflation Targeters Care About? A Comparative Bayesian Estimation of Central Bank Preferences," Economics Discussion Papers em-dp2016-12, Department of Economics, University of Reading.
    • Handle: RePEc:rdg:emxxdp:em-dp2016-12
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    Cited by:

    1. Juan David Durán-Vanegas, 2019. "Making hard choices: trilemmas and dilemmas of macroeconomic policy in Latin America," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 22(2), pages 022-038, August.
    2. McKnight, Stephen & Mihailov, Alexander & Pompa Rangel, Antonio, 2020. "What do Latin American inflation targeters care about? A comparative Bayesian estimation of central bank preferences," Journal of Macroeconomics, Elsevier, vol. 63(C).
    3. Rafael Guerra & Steven Kamin & John Kearns & Christian Upper & Aatman Vakil, 2024. "Latin America's non-linear response to pandemic inflation," BIS Working Papers 1209, Bank for International Settlements.
    4. Eduardo F Bastian & Mark Setterfield, 2020. "Nominal exchange rate shocks and inflation in an open economy: towards a structuralist inflation targeting agenda," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 44(6), pages 1271-1299.
    5. Federico Inchausti-Sintes & Ubay Pérez-Granja, 2022. "Monetary policy and exchange rate regime in tourist islands," Tourism Economics, , vol. 28(2), pages 325-348, March.

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    More about this item

    Keywords

    Bayesian estimation; central bank preferences; inflation targeting; Latin America; small open economies; incomplete asset markets; monetary policy;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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