US Monetary Policy Uncertainty Impact on Latin American Currency Market Volatility

Abstract

This paper analyzes whether the US Monetary Policy Uncertainty (MPU) impacts the exchange rate volatility of the Integrated Latin American Market (MILA) countries1, over the period 2004-2022. For this purpose, we employ univariate GARCH models and Vector Autoregressive Markov Switching Models (MS-VAR). Originality lies in the analysis of emerging countries using a dynamic model to observe how currencies volatility is affected through US Monetary Policy changes. This research also reveals how currency volatility evolves and which market is more vulnerable to foreign monetary shocks. Results evidence long memory and persistence in currencies volatility. In particular, the Colombian peso (COP), the Chilean peso (CLP) and the Peruvian sol (PEN) appear to have been affected in their behavior since the unconventional monetary policy measures implemented in 2008 during the global financial crisis. In contrast, the Mexican Peso (MXN) has been affected since the COVID-19 monetary policy changes. In terms of the MS-VAR results, all volatility currencies influence its own previous values. US MPU seems to impact the exchange rates volatility during the high volatility regime.