The Impact of Exchange Rate Regime on Interest Rates in Latin America*

Caroline Duburcq

Université de la Méditerranée, Aix-Marseille II

Email: caroline.duburcq@univmed.fr

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 Latin-American countries' interest rates between February 1998 and April 2009. Three countries have hard-peg while the remaining five follow alternative regimes. The long and short-run determinants of domestic rates as well as an impulse response analysis prove that economies with rigidly-fixed exchange rates do not bear a loss of monetary autonomy substantially higher than that of floating-rate economies, with the exception of Brazil.

JEL: E43, F31, C32

Keywords: Interest Rate Determination, Exchange Rate Regime, Vector Error Correction Models

Desarrollamos un marco teórico para estudiar el impacto del régimen de tipo de cambio en la determinación de las tasas de interés. Usando VECM, evaluamos el rol de las condiciones internas y de factores de EE.UU. en la determinación de las tasas de interés de ocho países de América Latina entre febrero de 1998 y abril de 2009. Tres de estos países tienen tipo de cambio fijo. Los determinantes de corto y largo plazo de las tasas internas, así como el análisis de impulsorespuesta sugieren que -con la sola excepción de Brasil- economías con tipos ]]> de cambio fijo no pierden autonomía monetaria respecto a aquellas con tipo de cambio flexible.

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* I thank Eric Girardin as well as an anonymous referee for comments and suggestions which were very helpful in improving the present paper.