Uruguay: Selected Issues

As in many other countries around the world, the recent surge in commodity prices has contributed to pushing up prices in Uruguay. This has coincided with domestic demand pressures associated with strong consumption and investment growth. For policy purposes it is, however, important to be able to disentangle the relative magnitude of these two forces: while domestic overheating clearly requires a contractive policy response, in the case of external price shocks the challenge for monetary policy is to limit second-round effects. In this context, it is necessary to assess the magnitude of such second-round effects.