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Monetary Policy Independence under Flexible Exchange Rates: An Illusion?
Author(s) -
Edwards Sebastian
Publication year - 2015
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12262
Subject(s) - monetary policy , economics , latin americans , independence (probability theory) , monetary economics , exchange rate , inflation targeting , inflation (cosmology) , central bank , capital flows , international economics , macroeconomics , market economy , political science , liberalization , statistics , physics , mathematics , theoretical physics , law
I analyse whether countries with flexible exchange rates are able to pursue an independent monetary policy, as suggested by traditional theory. I use data for three Latin American countries with flexible exchange rates, inflation targeting and capital mobility – Chile, Colombia and Mexico – to investigate the extent to which Federal Reserve actions are translated into local central banks' policy rates. The results indicate that there is significant ‘policy contagion’ and that these countries tend to ‘import’ Fed policies. The degree of monetary policy independence is lower than what traditional models suggest.