Exploring monetary policy with imperfect credibility: The case of Uruguay
Year: 2025
Type: article
Abstract: This paper examines the relationship between credibility and monetary policy in Uruguay using a semi-structural New Keynesian model. The study highlights the importance of credibility in the design of monetary policy. In the context of cost-push shocks, lower credibility is associated with higher interest rate hikes, greater pressure for domestic currency appreciation, and a more pronounced contraction in aggregate demand. In an environment of imperfect credibility, in conjunction with the growing response of non-tradable inflation in the upward economic cycle, the response of monetary policy in a scenario of excess demand shocks entails higher costs for stabilizing inflation and output. Delaying the monetary policy response in the face of excess demand shocks can lead to increased output, inflation expectations, and actual inflation. The reaction of inflation may be strengthened if the shocks are anticipated. In a disinflation plan, high credibility can mitigate economic fluctuations and lower the cost of implementing measures. The empirical results indicate a slight improvement in the credibility of monetary policy in Uruguay in 2023.
Author: Patricia Carballo
Institution: Banco Central del Uruguay
Language: English
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $1,700
OpenAlex ID: W4407089798