Domestic and external factors in interest rate determination: the minor role of the exchange rate regime

We compare the behavior of short term interest rates in hard-peg and floating-exchange-rate countries. We use a framework which allows both domestic and foreign factors to play a role in the determination of interest rates and assess them empirically for eight Latin American countries between January 1998 and April 2009. Two countries have hard peg while the remaining six follow alternative exchange rate regimes. We find empirical evidence that economies with rigidly-fixed exchange rates do not bear a loss of monetary autonomy above and beyond that of floating-exchange-rate economies, with the exception of the region's largest country, Brazil, the only floating-rate-economy of our sample that proves to benefit from monetary freedom.