Four essays on central banking in Latin America under balance of payments dominance

Flexible inflation targeting was the choice of five of the seven largest Latin American economies in the late 1990s/early 2000s. This was combined with the prior choice for more open capital accounts and greater exchange rate flexibility, which had been adopted as part of the market liberalization policies spread throughout Latin America since the mid-1980s. However, most Latin American economies are characterized by balance of payments dominance: a condition in which the short-term macroeconomic dynamics is mainly determined by the external shocks that periodically hit these economies, particularly procyclical capital flows and terms of trade shocks. One of the major complications of the region is that these shocks tend to induce procyclical responses from fiscal and monetary authorities.

This dissertation consists of four empirical essays that study key elements of central banking in Latin America in a context of balance of payment dominance. The first essay analyses the exchange rate policy throughout the concept of fear of floating. The second paper examines the impact of external shocks on financial stability and the role of Basel regulations on its mitigation. The third paper measures the financial spillovers of developed economies’ conventional and unconventional monetary policy over the Latin American financial markets. The last paper assesses the effectiveness and determinants of monetary policy rate under balance of payments dominance.