The Credit Channel and Monetary Transmission in Brazil and Chile

We use an expectation-augmented SVAR representation of an open economy New Keynesian model to study monetary transmission in Brazil and Chile. The underlying structural model incorporates key features of monetary transmission in typical emerging-market economies, including a bank-credit channel and the role of external debt accumu-lation on country risk premia and exchange rate dynamics. We find that interest rate changes have swifter effects on output and inflation compared to advanced economies and that exchange rate dynamics plays an important role in monetary transmission. In particular, we find evidence of a positive intra-temporal effect of monetary tight-ening arising from a favourable effect of exchange rate appreciation on balance sheets and credit growth, tempering some of the standard inter-temporal effect. We also find that credit shocks have non-trivial effects on output and inflation in the two countries, being stronger in Chile than in Brazil