Monetary policy independence under flexible exchange rates: An illusion?

Produced by: 
National Bureau of Economic Research
Available from: 
January 2015
Paper author(s): 
Sebastian Edwards
Globalization - Trade
Macroeconomics - Economic growth - Monetary Policy

I analyze whether countries with flexible exchange rates are able to pursue an independent monetary policy, as suggested by traditional theory. I use data for three Latin American countries with flexible exchange rates, inflation targeting, and capital mobility – Chile, Colombia and Mexico – to investigate the extent to which Federal Reserve actions are translated into local central banks’ policy rates. The results indicate that there is significant “policy contagion,” and that these countries tend to “import” Fed policies. The degree of monetary policy independence is lower than what traditional models suggest.


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