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Asymmetric Monetary and Exchange Rate Policies in Latin America

Libman, Emiliano (2017): Asymmetric Monetary and Exchange Rate Policies in Latin America.

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Abstract

During the last decades, the number of countries that adopted more fexible exchange rate regimes, in particular Inflation Targeting, has been increasing steadily. Latin-America was no exception. Some authors have argued that there is a flaw in the way in which the system has been conducted in the region. When inflation falls, the Central Bank is reluctant to cut interest rates, but when inflation increases, the Central Bank is willing to raise interest rates very aggressively, adding an unnecessary bias to monetary and exchange rate policies. This paper analyzes the asymmetry of monetary and exchange rate policies in the five largest Latin-American Inflation Targeting countries, Brazil, Chile, Colombia, Mexico, and Peru. Using different econometric techniques, I find that the Central Banks, with the exception of Chile, suffer from "fear of floating". This is a more pronounced phenomenon for the case of Brazil and Mexico, as the literature has argued.

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