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The Monetary Policy Horizon in Chile and Other Inflation-Targeting Countries

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  • Fabián Gredig
  • Klaus Schmidt-Hebbel
  • Rodrigo Valdés

Abstract

Tolerating some volatility in the rate of inflation leads the design of inflation target characteristics—in inflation-targeting economies—to reflect flexibility in four dimensions, namely: the price index that defines the target, the width of the target range, the midpoint of the monetary policy horizon (MPH) and the time range of the MPH. This paper evaluates Chile’s MPH—recently redefined by the Central Bank of Chile—in light of the Chilean experience and in an international comparison with other inflation targeters around the world. We review analytical and practical aspects of the formulation of the inflation-targeting framework. Then we present descriptive information on inflation, its volatility and its deviation from the target for all inflation-targeting countries, in order to infer the actual degree of tolerance countries have had toward inflation rates’ deviation and volatility. Next we describe the current design of monetary policy in the four aforesaid dimensions of flexibility in inflation-targeting countries. Finally, we review inflation forecasts published by the Central Bank of Chile and evaluate the consistency between the announced MPH and the Bank’s actual policy horizon.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 438.

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Date of creation: Dec 2007
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Handle: RePEc:chb:bcchwp:438

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  1. Frederic Mishkin & Klaus Schmidt-Hebbel, 2006. "Does Inflation Targeting Make a Difference?," Working Papers Central Bank of Chile 404, Central Bank of Chile.
  2. Angel Cabrera & Luis Felipe Lagos, 2000. "Monetary Policy in Chile: a black box?," Working Papers Central Bank of Chile 88, Central Bank of Chile.
  3. Scott Roger & Mark R. Stone, 2005. "On Target? The International Experience with Achieving Inflation Targets," IMF Working Papers 05/163, International Monetary Fund.
  4. Verónica Mies & Felipe Morandé & Matías Tapia, 2002. "Política Monetaria y Mecanismos de Transmisión: Nuevos Elementos para una Vieja Discusión," Working Papers Central Bank of Chile 181, Central Bank of Chile.
  5. Héctor Bravo L. & Carlos García T. & Verónica Mies M. & Matías Tapia G., 2003. "Heterogeneidad de la Transmisión Monetaria: Efectos Sectoriales y Regionales," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 6(3), pages 5-26, December.
  6. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
  7. Eric Parrado, 2001. "Effects of Foreign and Domestic Monetary Policy in a Small Open Economy: the Case of Chile," Working Papers Central Bank of Chile 108, Central Bank of Chile.
  8. Patricio Rojas, 1993. "El Dinero como un Objetivo Intermedio de Política Monetaria en Chile: Un Análisis Empírico," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 30(90), pages 139-178.
  9. Francisco Rosende & Luis Oscar Herrera, 1991. "Teoría y Política Monetaria: Elementos para el Análisis," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 28(83), pages 55-94.
  10. Calvo, Guillermo A. & Mendoza, Enrique, 1998. "Empirical Puzzles of Chilean Stabilization Policy," Working Papers 98-02, Duke University, Department of Economics.
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Cited by:
  1. Patricio Jaramillo, 2008. "Estimación de Var Bayesianos para la Economía Chilena," Working Papers Central Bank of Chile 508, Central Bank of Chile.
  2. Patricio Jaramillo & Juan Carlos Piantini, 2008. "Multimodality Test and Mixture Distributions: An Application to the Central Bank Expectation Survey," Working Papers Central Bank of Chile 489, Central Bank of Chile.
  3. Man-Keung Tang & Xiangrong Yu, 2011. "Communication of Central Bank Thinking and Inflation Dynamics," IMF Working Papers 11/209, International Monetary Fund.

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