Testing Interest Rate Contagion in Latin America Using a Modified Taylor Rule Open Access

del Rio, Vicente Antonio (2010)

Permanent URL: https://etd.library.emory.edu/concern/etds/5q47rp28m?locale=en
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Abstract


Abstract

Studies that focus on explaining Latin American central bank's monetary policy objectives usually do not look at the contagion effect from the U.S. Using the Taylor rule, a rule developed in 1993 to explain monetary policy in the U.S. I will test for the applicability of this rule to three Latin American economies; Mexico, Brazil, and Colombia. I will then modify the equation in order to include U.S. variables so as to test for a contagion effect from the U.S. to these Latin American economies. I find evidence that in certain cases these variable are statistically significant in the data sample, and that further research is warranted in order to determine if the equation actually measures any contagion effect.

Table of Contents

Table of Contents

I. Introduction .....1

II. Literature Review ..... 5

III. Data ..... 7

IV. Analysis ..... 8

IV. 1) i * t = ß1 (Inflation) + ß2 (output gap) + ε for the linear and quadratic output gap .....8

IV. 2) i * t = ß1 (Inflation) + ß2 (output gap) + ß3 Fourth order lag of money market rate + ε .....13

IV. 3) i * t = ß1 (Inflation) + ß2 (output gap) + ß3 i * US + ε .....15

IV. 4) i * t = ß1 (Inflation lat am) + ß2 (output gap lat am) + ß3 (Inflation US) + ß4 (output gap US) + ε.....17

IV. 5) i * t = ß1 (Inflation lat am) + ß2 (output gap lat am) + ß3 (Inflation US) + ß4 (output gap US) + ß5 Fourth order lag of money market rate + ε ..... 20

V. Conclusion ..... 23

VI. References ..... 22

VII. Appendices ..... 24

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