Working Paper: NBER ID: w20893
Authors: Sebastian Edwards
Abstract: 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.
Keywords: Monetary Policy; Flexible Exchange Rates; Policy Contagion; Latin America
JEL Codes: E5; E52; E58; F30; F31; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve interest rate changes (E43) | monetary policy rates in Chile (E52) |
| Federal Reserve interest rate changes (E43) | monetary policy rates in Colombia (E52) |
| Federal Reserve interest rate changes (E43) | monetary policy rates in Mexico (E52) |
| monetary policy rates in Colombia (E52) | monetary policy rates in response to Fed rate increase (E52) |
| monetary policy rates in Chile (E52) | monetary policy rates in response to Fed rate increase (E52) |
| monetary policy rates in Mexico (E52) | monetary policy rates in response to Fed rate increase (E52) |