Contractionary depreciations in Latin America during the 2000s
This paper explores the effects of currency depreciations on output for the main
Latin American countries that have been using Inflation Targeting for almost two decades.
We construct VAR models for Brazil, Chile, Colombia, Mexico and Peru for the last two
decades and we find that depreciations have short-run contractionary effects in Brazil and
Mexico. We illustrate some of the policy implications of that finding by building a simple
model, and we show that contractionary effects of depreciations may have destabilizing
effects when monetary policy is conducted using a standard Taylor Rule.
JEL Classification: E31; E52; E58.
Keywords: Inflation targeting vector autoregressions contractionary effects of devaluations monetary policy rules