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Inflation Targeting, Reserves Accumulation, and Exchange Rate Management in Latin America

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  • Roberto Chang

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Abstract

This paper examines whether central banks in Latin America have implemented conventional inflation targeting (IT) prescriptions, with a focus on foreign exchange intervention and official reserves accumulation policies. To this end, the paper reviews the experiences of Brazil, Chile, Colombia, and Peru, and finds significant departures from the dominant theory of IT. Foreign exchange intervention has often been used to prevent excessive financial volatility, bubbles, and panics. Ongoing patterns of reserves accumulation have been the outcome of an effort to build "war chests" against speculative attacks and, more recently, of a fight against real exchange appreciation. Possible justifications of the discrepancies between conventional IT theory and practice are discussed and generally found unsatisfactory.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 487.

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Handle: RePEc:bdr:borrec:487

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Keywords: Inflation Targeting; Exchange Rate Policy; International Reserves. Classification JEL: E5; F4.;

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  24. Piti Disyatat & Gabriele Galati, 2005. "The effectiveness of foreign exchange intervention in emerging market countries," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 97-113 Bank for International Settlements.
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  26. Hernando Vargas H., 2005. "Exchange Rate Policy and Inflation Targeting in Colombia," IDB Publications 6828, Inter-American Development Bank.
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