Institutional changes and the transmission of monetary policy shocks in Paraguay

In 1989, Paraguay experienced a regime change that went from dictatorship to democracy. This change has implied the adoption of policies compatible with the free market that included reforms in its monetary policy, focused primarily on the establishment of growth limits for the monetary base (M0) until 2003, and then a transition to inflation targeting by 2011. In this context, the research focus on the analysis of the transmission mechanisms of these monetary policies adopted in this new institutional framework, using a Bayesian Vector Autoregression (BVAR) model. The findings suggest that in the full sample period, if the interest rate is used as a monetary policy instrument, there is a price puzzle, while if monetary aggregates are used as an instrument, monetary policy has a significant and short-term effect in the output and in inflation. If the period is separated into before and after the adoption of the inflation targeting scheme, the results indicate that the use of monetary aggregates as a policy instrument is more effective both periods in the framework of a countercyclical intervention.