What do Latin American inflation targeters care about? A comparative Bayesian estimation of central bank preferences |
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| Institution: | 1. Centro de Estudios Económicos, El Colegio de México, Camino al Ajusco 20, Col. Pedregal de Santa Teresa, Mexico City, 10740, Mexico;2. Department of Economics, University of Reading, Whiteknights, PO Box 218, Reading, RG6 6AA, United Kingdom;3. Dirección General de Investigación Económica, Banco de México, Calle 5 de Mayo 18, Col. Centro, Mexico City, 06069, Mexico;1. Department of Business Administration, Frederick University, 7, Y. Frederickou Str., Nicosia 1036, Cyprus;2. Department of Economics, University of Piraeus, Greece;1. Northeast Asian Studies College, Jilin University, China;2. Department of Economics, University of Washington, USA;3. Department of Economics, Korea University, 145 Anamro, Seongbuk-Gu, Seoul 02841, South Korea;1. Washington University, St. Louis, USA;2. Federal Reserve Bank of St. Louis, USA;3. University of Milan, Department of Economics, Management, and Quantitative Methods, Italy;1. Department of Quantitative Economics, School of Business and Economics, Maastricht University, Maastricht, The Netherlands;2. Faculty of Economics and Business, University of Groningen, PO Box 800, 9700 AV, Groningen, The Netherlands;3. University of Tasmania, Australia;4. CAMA, Australia;5. CIRANO, Canada;6. Management School, University of Liverpool, Liverpool, UK;1. Department of Economics and Finance, University of Rome Tor Vergata, Via Columbia 2, Rome, 00133, Italy;2. World Bank, 1818 H Street NW, Washington DC, 20433, USA |
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| Abstract: | 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. |
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