Template-Type: ReDIF-Paper 1.0
Author-Name: Rafael Guerra
Author-X-Name-First: Rafael
Author-X-Name-Last: Guerra
Author-Name: Steven Kamin
Author-X-Name-First: Steven
Author-X-Name-Last: Kamin
Author-Name: John Kearns
Author-X-Name-First: John
Author-X-Name-Last: Kearns
Author-Name: Christian Upper
Author-X-Name-First: Christian
Author-X-Name-Last: Upper
Author-Name: Aatman Vakil
Author-X-Name-First: Aatman
Author-X-Name-Last: Vakil
Title: Latin America's non-linear response to pandemic inflation
Abstract: This paper estimates empirical Taylor rules to analyze the recent monetary policy of the five main Latin American inflation-targeting central banks. We find that during the inflationary surge of 2021–23, monetary policy reacted more strongly and more quickly to changes in inflation than predicted by a standard linear Taylor rule, estimated on data from the pre-pandemic period. Although this appears to represent a shift in the monetary reaction function, we think it more likely that Latin American central banks have been following a non-linear strategy, responding more aggressively to inflation, the higher it rose. We confirmed this by adding the square of inflation to the Taylor rule model: its coefficient was positive and significant, indicating that policy interest rates exhibited a non-linear response to inflation, even during the pre-pandemic period, and the model did a better job of predicting the sharp rise in interest rates during 2021–23. 
Creation-Date: 2024-09
File-URL: https://www.bis.org/publ/work1209.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1209.htm
File-Format: text/html
Number: 1209
Keywords: Latin America, central banks, monetary policy, Covid-19, interest rates
Classification-JEL: E52, E58, E50
Handle: RePEc:bis:biswps:1209