US Monetary Policy Uncertainty Impact on Latin American Currency Market Volatility

Miriam Sosa; Alejandra Cabello-Rosales; Edgar Ortiz  Calisto

doi:10.4067/S0718-88702025000100067

Authors

Miriam Sosa Metropolitan Autonomous University
Alejandra Cabello-Rosales National Autonomous University of Mexico https://orcid.org/0000-0002-3569-1142
Edgar Ortiz Calisto National Autonomous University of Mexico https://orcid.org/0000-0001-5486-2982

DOI:

https://doi.org/10.4067/S0718-88702025000100067

Keywords:

Monetary Policy Uncertainty, Latin American Countries, Exchange Rate Volatility, GARCH Model, MS-VAR Approach

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.

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