External Shocks and the Coordination of Monetary and Macroprudential Policies in the Economies of the Pacific Alliance

Recently, the economies that make up the Pacific Alliance (Chile, Colombia, Mexico, and Peru) have achieved trade integration, made progress toward financial integration, and been able to weather the spillover effects caused by global shocks that have occurred outside the bloc. But would the members of the Pacific Alliance fare even better if they coordinated their policy responses when facing external global shocks? To answer this question, we propose a framework based on the International Monetary Fund’s (IMF) Global Projection Model (GPM), which incorporates real and financial linkages between countries. Additional equations for terms of trade, commodities, portfolio investment flows, foreign direct investment flows, credit, interest rates on loans, and macroprudential policy are included to create a more comprehensive model. The results show that in the face of global shocks originating in China and the United States, the economies of the Pacific Alliance generally fare better when they coordinate their policy responses than when they do not.