A Comparison of Product Price Targeting and Other Monetary Anchor Options, for Commodity Exporters in Latin America
AbstractSeven possible nominal variables are considered as candidates to be the anchor or target for monetary policy. The context is countries in Latin America and the Caribbean (LAC), which tend to be price takers on world markets, to produce commodity exports subject to volatile terms of trade, and to experience procyclical international finance. Three anchor candidates are exchange rate pegs: to the dollar, euro and SDR. One candidate is orthodox Inflation Targeting. Three candidates represent proposals for a new sort of inflation targeting that differs from the usual focus on the CPI, in that prices of export commodities are given substantial weight and prices of imports are not: PEP (Peg the Export Price), PEPI (Peg an Export Price Index), and PPT (Product Price Targeting). The selling point of these production-based price indices is that each could serve as a nominal anchor while yet accommodating terms of trade shocks, in comparison to a CPI target. CPI-targeters such as Brazil, Chile, and Peru are observed to respond to increases in world prices of imported oil with monetary policy that is sufficiently tight to appreciate their currencies, an undesirable property, which is the opposite of accommodating the terms of trade. As hypothesized, a product price target generally does a better job of stabilizing the real domestic prices of tradable goods than does a CPI target. Bottom line: A Product Price Targeter would appreciate in response to an increase in world prices of its commodity exports, not in response to an increase in world prices of its imports. CPI targeting gets this backwards.
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Date of creation: Jul 2011
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Other versions of this item:
- Jeffrey Frankel, 2011. "A Comparison Of Product Price Targeting And Other Monetary Anchor Options, For Commodity Exporters In Latin America," Journal of LACEA Economia, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
- Frankel, Jeffrey A., 2011. "A Comparison of Product Price Targeting and Other Monetary Anchor Options, for Commodity Exporters in Latin America," Scholarly Articles 5098431, Harvard Kennedy School of Government.
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-02 (All new papers)
- NEP-CBA-2011-08-02 (Central Banking)
- NEP-INT-2011-08-02 (International Trade)
- NEP-LAM-2011-08-02 (Central & South America)
- NEP-MAC-2011-08-02 (Macroeconomics)
- NEP-MON-2011-08-02 (Monetary Economics)
- NEP-OPM-2011-08-02 (Open Economy Macroeconomic)
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