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What do Latin American inflation targeters care about? A comparative Bayesian estimation of Central Bank preferences

McKnight, S., Mihailov, A. and Pompa Rangel, A. (2020) What do Latin American inflation targeters care about? A comparative Bayesian estimation of Central Bank preferences. Journal of Macroeconomics, 63. 103188. ISSN 0164-0704

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To link to this item DOI: 10.1016/j.jmacro.2019.103188

Abstract/Summary

This paper employs Bayesian estimation to uncover the central bank preferences of the five Latin American inflation targeting countries with floating exchange rates: Brazil, Chile, Colombia, Mexico, and Peru. The target weights of each country's central bank loss function are estimated using a medium-scale small open economy New Keynesian model with imperfect exchange-rate pass-through under either complete or incomplete international asset markets. Bayesian model comparison selects: (i) unambiguously the complete markets model version; (ii) the model specification with explicit concern for real exchange rate stabilization, with the exception of Peru. Our results suggest that the central banks of Mexico and Peru are closest to following a strict inflation targeting regime, whereas Brazil, Chile, and Colombia also assign a sizeable weight to output gap and real exchange rate stabilization. Finally, the estimated preference weights for each central bank are shown to credibly reflect their legal mandates.

Item Type:Article
Refereed:Yes
Divisions:Faculty of Arts, Humanities and Social Science > School of Politics, Economics and International Relations > Economics
ID Code:88052
Publisher:Elsevier

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