LATIN AMERICAN CENTRAL BANKS’ LOSS FUNCTION
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Abstract
In this research, we analyze the loss function of Central Banks (CB) in Latin American economies that apply the inflation targeting model. Following Carlin and Soskice (2006, 2009 y 2024), the CB displays their preferences through a trade-off between output growth and inflation, with a strong aversion for the latter. When inflation rises above their target, CB experience microeconomic detriment, increasing their losses. Nonetheless, some institutions prioritize output gaps, showing dual objectives and aiming for a balance between inflation and growth. Our methodology employs a rolling regression model for Brazil, Chile, Colombia, and Mexico, analyzing the period 2003-2024. The main contribution of this research is to identify the preferences of the different CB that apply the inflation targeting model and to determine their level of aversion to inflation.
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References
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