What was the role played by the inflation formation processes, monetary policy, and shocks volatilities in the inflation dynamics of Brazil, Chile, Colombia, Mexico, and Peru?

In this research project (https://lnkd.in/gupfXu85) we analyze the role played by monetary policies, inflation determinants, and shocks. We allow for endogenous structural breaks and classify regimes according to (1) the relative weight of inflation in an interest rate reaction function, which measures the Central Bank’s commitment to fight inflation, (2) the relative slope of the Phillips curve, with a steeper curve implying that inflation is more sensitive to economic conditions, and (3) the shock volatility of technology. We perform counterfactuals under different monetary policies, price rigidities, and shocks volatilities.

In Brazil, regime switch to high reaction of monetary policy and lower volatility of shocks help to explain the observed reduction of inflation and its volatility despite the regime switch to a more steep Phillips Curve.

In Chile, high reaction of monetary policy kept inflation low without implying higher interest rates, neither lower or more volatile output.

In Colombia, regime switch to high reaction of monetary policy and a lower slope of the Phillips Curve help to explain the observed reduction of inflation and its volatility, without implying higher interest rates, neither lower or more volatile output.

In Mexico, regime switch to high reaction of monetary policy, a lower slope of the Phillips Curve, and especially lower shocks volatility help to explain the observed reduction of inflation and its volatility without implying higher interest rates, neither lower or more volatile output.

In Peru, regime switch to high reaction of monetary policy, a lower slope of the Phillips Curve, and lower shocks volatility help help to explain the observed reduction of inflation and its volatility without implying higher interest rates, neither lower or more volatile output.

This framework, that was useful to explain the desinflationary processes that took place with the introduction of Inflation Targeting in these countries, will be updated to understand the determinants of the recent inflationary dynamics.