Abstract
ABSTRACT This paper explores the effects of currency depreciations on output for the main Latin American countries that have been using Inflation Targeting for almost two decades. We construct VAR models for Brazil, Chile, Colombia, Mexico and Peru for the last two decades and we find that depreciations have short-run contractionary effects in Brazil and Mexico. We illustrate some of the policy implications of that finding by building a simple model, and we show that contractionary effects of depreciations may have destabilizing effects when monetary policy is conducted using a standard Taylor Rule.
Highlights
Inflation Targeting has become a popular choice
We construct a series of Vector Autoregressive models for the five most important Latin American countries that have been using Inflation Targeting for almost two decades (Brazil, Chile, Colombia, Mexico, and Peru)
We focus on the effects of exchange rate shocks on output and the consumer price index spanning the late 1990s or the early 2000s and 2019, but the remaining of the results are available on request
Summary
Inflation Targeting has become a popular choice. The number of countries that have adopt it the framework has been increasing steadily over the past three decades, including low- and middle-income economies. Since the late 1990s, several Latin American countries have adopted a policy framework that involves high capital mobility with relatively flexible exchange rate regimes and Inflation Targeting. The results are statistically significant at standard levels in Brazil and Mexico Because these effects are short-run in nature, they do not necessarily contradict large and growing body of papers that suggest that the level of the real exchange rate is positively correlated with economic growth (see Bresser-Pereira, 2012, 2013; Gabriel et al, 2020; Missio et al, 2015; Oreiro and Da Agostini 2017; Oreiro and Santana, 2018; Rodrik, 2008; and Razmi et al, 2012).
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