Inflation Targeting in Latin America

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January 2014
Paper author(s): 
Adolfo Barajas
Roberto Steiner
Leonardo Villar
César Pabón
Macroeconomics - Economic growth - Monetary Policy

We examine how monetary policy has been conducted in four early adopters of Inflation Targeting: Brazil, Chile, Colombia and Peru. First, a Markov-Switching approach shows that while all four countries exhibit considerable stability in their responses to the inflation and output gaps, most have departed from this rule in times of extreme turmoil. We also find evidence of an "extended" or "integrated" IT approach in two countries, the policy rate responding to either a real exchange rate or a private credit gap, the latter possibly indicating financial stability concerns. We do not find evidence of changes in credibility over time. Second, forex intervention is driven primarily by exchange rate misalignments rather than by exchange rate volatility or by an international reserves objective. Such intervention generally responds more strongly to appreciations than to depreciation and does not respond to inflation. Thus, IT in these countries so far can be characterized as flexible, coexisting with a degree of fear of floating and a financial stability objective, either built directly into the policy rule or complemented with macro-prudential measures.


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