A Comparison of Monetary Policy Shock Transmission in Latin America: A Hierarchical VAR Panel

This paper evaluates and compares the effects of monetary policy shocks in Latin American countries that have implemented an inflation-targeting framework (Brazil, Chile, Colombia, Mexico, and Peru). A hierarchical panel VAR model is estimated, which allows for the efficient use of data while also taking advantage of cross-country heterogeneity. Monetary shocks are identified using an agnostic procedure that imposes zero and sign constraints. A real short-term effect of monetary policy on output is found (peaking around 12 to 15 months); a significant medium-term response in prices, with the absence of the so-called “price puzzle”; and a hump-shaped response in the exchange rate—that is, weak evidence of the “delayed overshooting puzzle.” However, there is a certain degree of heterogeneity in the effects and the propagation of monetary shocks across countries. In particular, the effects on output and prices are stronger in Brazil and Peru than in Chile, Colombia, and Mexico, and the exchange rate reaction is stronger in Brazil, Chile, and Colombia than in Mexico and Peru. Finally, the weighted average impulse response following a monetary shock—which is representative of the region—is presented.