An indicator of monetary bias for emerging and partially dollarized economies: the case of Uruguay

Abstract

The instability of the relationships between interest rates, amount of money, and exchange rate, and the transmission problems between different interest rates hinder the measurement of monetary policy through a single variable. This difficulty is particularly relevant in emerging and partially dollarized economies. This paper proposes a multivariate indicator of monetary bias for these economies in which the monetary and financial variables are considered according to the impact they have on inflation. We use a Factor Augmented Vector AutoRegressive Moving Average model with eXogenous variables (FAVARMAX) to estimate these effects in the case of Uruguay. Using the evolution of Monetary Conditions Index (MCI) proposed, we characterize the policy adopted by the Central Bank of Uruguay between 2010–2019, a period of inflation targeting.