Contractionary Devaluations in Latin America

GUIDO ZACK; EMILIANO LIBMAN; MARTÍN MONTANÉ

Conferencia; I Conferencia sobre Planificación del Desarrollo Julio H. G. Olivera; 2018

This paper explores the effects of exchange rate variation on output for Latin-American Inflation Targeting countries. We use a simple model that shows that contractionary devaluation may lead to instability when monetary policy is conducted using only a standard Taylor Rule. We explore VAR models for Brazil, Chile, Colombia, Mexico, and Peru, and we find that contractionary short-run effects are present. Interventions in the foreign exchange market and unconventional monetary policies may help to preserve stability and may increase the success of Inflation Targeting when devaluations have strong short-run contractionary effects