The current monetary policy framework in several Latin American countries, combining inflation targeting and
a floating exchange-rate regime, has contributed to disinflation by anchoring expectations around low, stable
levels. This paper uses co-integration analysis to estimate simultaneously a monetary reaction function and the
determinants of expected inflation for Brazil, Chile, Colombia and Mexico in the post-1999 period. It also tests
for the presence of volatility spillovers between the monetary stance and inflation expectations based on
M-GARCH modelling. The results of the empirical analysis show that: i) there are long-term relationships
between the interest rate, expected inflation and the inflation target, suggesting that monetary policy has been
conducted in a forward-looking manner and helped anchor inflation expectations in the countries under
examination, and ii) greater volatility in the monetary stance leads to higher volatility in expected inflation in
Brazil, Colombia and Mexico, suggesting that interest-rate smoothing contributes to reducing inflation
expectations volatility. No volatility spillover effect was detected in the case of Chile.
Monetary Policy and Inflation Expectations in Latin America
Long-run Effects and Volatility Spillovers
Working paper
OECD Economics Department Working Papers
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