Do Latin American Central Bankers Behave Non-Linearly? The Experiences of Brazil, Chile, Colombia and Mexico

Abstract

This paper contributes to the empirical literature on inflation zone targeting by estimating monetary reaction functions in a non-linear cointegration framework for Brazil, Chile, Colombia and Mexico. Evidence shows that central banks respond linearly to deviations of expected inflation from the target (the inflation gap) in Brazil and Chile. As the inflation gap widens, policy responses become weaker in Colombia and Mexico, a finding that most probably reflects a history of adverse supply shocks rather than a lack of resolve from the monetary authorities. Non-linearity is also found in the central bank’s response to fluctuations in the exchange rate in Brazil and Colombia.

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