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Monetary policy and macroeconomic stability in Latin America: The cases of Brazil, Chile, Colombia and Mexico

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This chapter 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.
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Document Type: Review Article

Publication date: April 1, 2008

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