BANCO DE LA CIUDAD DE BUENOS AIRES Federico Sturzenegger President Banco Ciudad de Buenos Aires Ernesto Talvi Executive Director CERES Unveiling monetary policy in Latin America May, 8th of 2008

Banco Ciudad de Buenos Aires Inflation has fallen dramatically Weighted average of inflation for selected Latin American countries * * Argentina, Bazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela

Banco Ciudad de Buenos Aires Weighted average of inflation for selected Latin American countries * * Argentina, Bazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela Inflation has fallen dramatically

Banco Ciudad de Buenos Aires Volatility of output has fallen as well Standard deviation of cyclical component of GDP Weigthed average of selected Latin American countries * * Argentina, Bazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela

Banco Ciudad de Buenos Aires Even exchange rate volatility has fallen Weighted average of standard deviation of nominal exchange rate for selected Latin American countries * * Argentina, Bazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, Venezuela

Banco Ciudad de Buenos Aires What is the role of monetary policy in these changes? That´s too difficult of a question to answer But can we at least describe monetary policy? This is also not so easy, as there are de facto and de jure regimes

Banco Ciudad de Buenos Aires How could we characterize monetary policy? A common representation is a Taylor rule Taylor´s (1993) equation: But not really … Orphanides (2001)

Banco Ciudad de Buenos Aires How could we estimate a Taylor rule? Just run a regression: wrong Do IVs (Gali and Gertler, 2000) –But this is too volatile Use a structural model –This means taking a GE model and estimating all the equations jointly –Lubik and Schorfheide (2007) do it and have lent us their codes

It follows Gali and Monacelli (2005) It is an open economy general equilibrium keynesian model which is summarized by three equations –Dynamic IS-LM curve –Phillips curve –A Taylor rule Banco Ciudad de Buenos Aires What is the model?

CB reaction coefficient Fear of floating coefficient Output motive coefficient Anti inflation coefficient Banco Ciudad de Buenos Aires Interpreting our Taylor rule

Banco Ciudad de Buenos Aires General results

Banco Ciudad de Buenos Aires These policies are a change from the past

Banco Ciudad de Buenos Aires What do individual country stories tell? Brazil

Banco Ciudad de Buenos Aires Mexico

Banco Ciudad de Buenos Aires Chile

Banco Ciudad de Buenos Aires Peru

Banco Ciudad de Buenos Aires Uruguay

Banco Ciudad de Buenos Aires Venezuela (ER unofficial)

Banco Ciudad de Buenos Aires Colombia

Banco Ciudad de Buenos Aires Ecuador

Banco Ciudad de Buenos Aires Argentina

Implications for times of crisis In Ortiz, Ottonello, Sturzenegger and Talvi (2007) we looked at the impact of monetary (and fiscal) policy on output in a SSS We first compute as the dependent variable the output performance during SSS, as described by the (output) peak to trough variations ( ). We then related our measures of monetary (and fiscal) policy to output performance by performing simple OLS regressions We measured relative toughness of policy by the ratios of the coefficients in the Taylor rule (2.768) (-1.920) (-1.850) Banco Ciudad de Buenos Aires

Monetary policy and crisis resilience Banco Ciudad de Buenos Aires The result above suggests that a decline in the ratios leads to lower output declines in crises Argentina, Brazil, and Colombia appear to have gained flexibility Chile, Ecuador, Mexico and Peru, not

Banco Ciudad de Buenos Aires Conclusions A proper characterization of monetary policy is possible It shows a switch toward inflation objectives away from the exchange rate Very solid and very stable in most countries The exceptions are Ecuador and Argentina Whether the new configuration of monetary policy has prepared Latin America better for a crisis is still an open question