The impact of exchange rate regime on interest rates in Latin America

Abstract

We develop a theoretical framework to study the impact of the exchange rate regime in the interest rate determination. Using VECM, we assess the role of both domestic conditions and US factors in the determination of eight Latin4American countries' interest rates between February 1998 and April 2009. Three countries have hard4peg while the remaining five follow alternative regimes. The long and short4run determinants of domestic rates as well as an impulse response analysis prove that economies with rigidly4fixed exchange rates do not bear a loss of monetary autonomy substantially higher than that of floating4rate economies, with the exception of Brazil.