Inflation Targeting in Brazil, Chile, and Mexico: Performance, Credibility, and the Exchange Rate
AbstractInflation targeting (IT) has been adopted by a growing number of countries and Latin America has been part of this world trend. This paper reviews the recent IT experiences of Brazil, Chile, and Mexico, applying a common empirical framework to the three country cases. Inflation performance under IT and its associated output costs are reported and compared favorably to a control group of other countries. The paper analyzes ways by which IT has contributed to strengthen credibility: the effect of targets on inflation expectations and on actual inflation, the low influence of inflation shocks on core inflation, and the decline in inflation forecast errors. Do the three inflation targeters exhibit fear of floating? No, considering their relatively large exchange rate volatility and moderate international reserve holdings. No, considering strongly declining inflation-to-devaluation passthrough coefficients and little evidence for monetary policy reaction to exchange rate shocks. Yes, considering the frequency and intensity of sterilized exchange interventions in comparison to other inflation targeters that float more cleanly.
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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 171.
Date of creation: Aug 2002
Date of revision:
Other versions of this item:
- Klaus Schmidt-Hebbel & Alejandro M. Werner, 2002. "Inflation Targeting in Brazil, Chile, and Mexico: Performance, Credibility, and the Exchange Rate," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-08-16 (All new papers)
- NEP-CBA-2002-08-16 (Central Banking)
- NEP-IFN-2002-08-16 (International Finance)
- NEP-LAM-2002-07-31 (Central & South America)
- NEP-MON-2002-08-16 (Monetary Economics)
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