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

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Available from: 
November 2016
Paper author(s): 
Stephen McKnight
Alexander Mihailov
Antonio Pompa Rangel
Topic: 
Financial Economics
Macroeconomics - Economic growth - Monetary Policy
Year: 
2016

This paper uses Bayesian estimation techniques to uncover the central bank preferences of the big Öve Latin American ináation targeting countries: Brazil, Chile, Colombia, Mexico, and Peru. The target weights of each central bankís 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 ináation 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 áuctuations. Overall, Brazil, Colombia, and Peru show evidence of implementing a strict ináation targeting policy, whereas Chile and Mexico follow a more áexible 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 di§erent under complete asset markets. This highlights the sensitivity of Bayesian estimation, particularly when uncovering central bank preferences, to alternative international asset market structures.

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