Global spillovers and coordination of monetary and macroprudential policies in the Pacific Alliance economies

In recent times the Pacific Alliance member economies (Chile, Colombia, Mexico and Peru) have managed to achieve trade integration, have made an important progress in their financial integration and have withstood the spillovers from the global shocks that had risen from abroad. But, would the Pacific Alliance members be better off if they coordinated their monetary and macro prudential policy responses when facing the spillovers from these external global shocks? To test this we propose a framework based on the Global Projection Model (GPM) of the International Monetary Fund (IMF), which features real and financial linkages between countries. We introduce additional equations for terms of trade, commodities, portfolio inflows, foreign direct investment inflows, lending, lending interest rates and macro prudential policy with the objective of having a more comprehensive model. In the no-coordination case, we consider six countries: the four member economies of the Pacific Alliance acting separately, China and USA. The coordination case involves three parties: the Pacific Alliance acting as one country, China and USA. In this case of full coordination among Pacific Alliance countries, the members act as if they followed the same monetary and macroprudential policies. We find that upon global shocks spillovers coming from China and the United States, the Pacific Alliance member economies are mostly better off when coordinating monetary and macro prudential policy responses than when not.