Financial and Real Shocks and the Effectiveness of Monetary and Macroprudential Policies in Latin American Countries

38 Pages Posted: 10 Nov 2017

See all articles by Javier Garcia Cicco

Javier Garcia Cicco

Central Bank of Chile

Markus Kirchner

Central Bank of Chile

Julio A. Carrillo

Bank of Mexico - Economic Studies

Diego Rodríguez

Banco de la República, Colombia

Fernando J. Pérez Forero

Central Reserve Bank of Peru

Rocío Gondo

Bank for International Settlements (BIS); Central Reserve Bank of Peru

Carlos Montoro

Central Reserve Bank of Peru

Roberto Chang

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 2017

Abstract

This work compares the impact of monetary and macroprudential policies on financial and real sectors in four Latin American countries: Chile, Colombia, Mexico and Peru, and explores the commonalities and differences in the reaction to shocks to both the financial and real sector. In order to do that, we estimate a New Keynesian small open economy model with frictions in the domestic financial intermediation sector and a commodity sector for each country. Results suggest that financial shocks are important drivers of output and investment fluctuations in the short run for most countries, but in the long run their contribution is small. Furthermore, we evaluate the ability of macroprudential policies to limit the impact on credit growth and its effect on real variables. In a scenario of tighter financial conditions, monetary policy becomes expansionary due to both lower inflation (given the exchange rate appreciation) and weaker output growth, and macroprudential policies further contribute to restoring credit and output growth. However, in the case of a negative commodity price shock, macroprudential policies are less effective but useful as a complement for the tightening of monetary policy. Higher inflation (due to the exchange rate depreciation) and higher policy rates lead to a contraction in output growth, but macroprudential policies could alleviate this by improving credit conditions.

Keywords: central banking, monetary policy, macroprudential policy, financial frictions

JEL Classification: E52, F41, F47

Suggested Citation

Garcia Cicco, Javier and Kirchner, Markus and Carrillo, Julio A. and Rodríguez, Diego and Pérez Forero, Fernando J. and Gondo, Rocío and Montoro, Carlos and Chang, Roberto, Financial and Real Shocks and the Effectiveness of Monetary and Macroprudential Policies in Latin American Countries (October 2017). BIS Working Paper No. 668, Available at SSRN: https://ssrn.com/abstract=3064188

Javier Garcia Cicco (Contact Author)

Central Bank of Chile

Publicaciones
Huerfanos 1185
Santiago
Chile

Markus Kirchner

Central Bank of Chile ( email )

United States

Julio A. Carrillo

Bank of Mexico - Economic Studies ( email )

Av. 5 de Mayo # 18
3er. Piso
Mexico City, 06059 D.F.
Mexico

Diego Rodríguez

Banco de la República, Colombia ( email )

Carrera 7 #14-78
3551 de Bogotá
Colombia

Fernando J. Pérez Forero

Central Reserve Bank of Peru ( email )

Jirón Miroquesada 441
Lima, Lima 1
Peru

Rocío Gondo

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Central Reserve Bank of Peru ( email )

Jirón Miroquesada 441
Lima, Lima 1
Peru

Carlos Montoro

Central Reserve Bank of Peru ( email )

Jirón Miroquesada 441
Lima, Lima 1
Peru

Roberto Chang

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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