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Monetary policy strategies for Latin America

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  • Mishkin, Frederic S.
  • Savastano, Miguel A.

Abstract

The authors examine possible monetary policy strategies for Latin America that may help lock in the gains the region attained in the fight against inflation in the 1990s. Instead of focusing the debate about the conduct of monetary policy on whether the nominal exchange rate should be fixed or flexible, the focus should be on whether the monetary policy regime appropriately constrains discretion in monetary policymaking. Three basic frameworks deserve serious discussion as possible long-run strategies for monetary policy in Latin America. The authors examine the advantages and disadvantages of a hard exchange-rate peg, monetary targeting, and inflation targeting, in light of monetary policy's recent track record in several Latin American countries, looking for clues about which of the strategies might be best suited to economies in the region. The answer: It depends on the country's institutional environment. Some countries appear not to have the institutions to constrain monetary policy if discretion is allowed. In those countries, there is a strong argument for hard pegs, including full dollarization, that allow little or no discretion to monetary authorities. In countries such as Chile, which can constrain discretion, inflation targeting is likely to produce a monetary policy that keeps inflation low yet appropriately copes with domestic and foreign shocks. Monetary targeting as a strategy for Latin America is not viable because of the likely instability of the relationship between inflation and monetary aggregates, of which there is ample international evidence. No monetary strategy can solve the basic problems that have existed in Latin American economies for a long time. The authors welcome the recent move in Latin American countries toward inflation targeting, but say no policy will succeed unless government policies also create the right institutional environment.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2685.

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Date of creation: 31 Oct 2001
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Handle: RePEc:wbk:wbrwps:2685

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Keywords: Financial Intermediation; Payment Systems&Infrastructure; Fiscal&Monetary Policy; Economic Theory&Research; Banks&Banking Reform; Financial Intermediation; Banks&Banking Reform; Economic Stabilization; Economic Theory&Research; Macroeconomic Management;

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References

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  1. Mishkin, Frederic S. & Savastano, Miguel A., 2001. "Monetary policy strategies for Latin America," Policy Research Working Paper Series 2685, The World Bank.
  2. Peter L. Rousseau & Richard Sylla, 1999. "Emerging Financial Markets and Early U.S. Growth," NBER Working Papers 7448, National Bureau of Economic Research, Inc.
  3. Ben Bernanke & Frederic Mishkin, 1992. "Central Bank Behavior and the Strategy of Monetary Policy: Observations from Six Industrialized Countries," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 183-238 National Bureau of Economic Research, Inc.
  4. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
  5. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc.
  6. Guillermo A. Calvo & Carlos A. Végh, 1994. "Inflation Stabilization And Nominal Anchors," Contemporary Economic Policy, Western Economic Association International, vol. 12(2), pages 35-45, 04.
  7. Svensson, Lars E O, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," CEPR Discussion Papers 1511, C.E.P.R. Discussion Papers.
  8. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  9. Vittorio Corbo, 1998. "Reaching One-Digit Inflation: The Chilean Experience," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 123-163, November.
  10. Guillermo A. Calvo & Carlos A. Vegh, 1999. "Inflation Stabilization and BOP Crises in Developing Countries," NBER Working Papers 6925, National Bureau of Economic Research, Inc.
  11. Mishkin, F.S., 1998. "International Experiences with Different Monetary Policy Regimes," Papers 648, Stockholm - International Economic Studies.
  12. Carlo Cottarelli & Curzio Giannini, 1997. "Credibility Without Rules," IMF Occasional Papers 154, International Monetary Fund.
  13. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A price target for U.S. monetary policy? Lessons from the experience with money growth targets," Working Paper Series, Macroeconomic Issues WP-96-14, Federal Reserve Bank of Chicago.
  14. Bennett T. McCallum, 1996. "Inflation Targeting in Canada, New Zealand, Sweden, the United Kingdom, and in General," NBER Working Papers 5579, National Bureau of Economic Research, Inc.
  15. Arturo Estrella & Frederic S. Mishkin, 1996. "Is There a Role for Monetary Aggregates in the Conduct of Monetary Policy?," NBER Working Papers 5845, National Bureau of Economic Research, Inc.
  16. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc.
  17. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
  18. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
  19. Maurice Obstfeld & Kenneth Rogoff, 1995. "The mirage of fixed exchange rates," Working Papers in Applied Economic Theory 95-08, Federal Reserve Bank of San Francisco.
  20. Frederic S. Mishkin, 2000. "Lessons from the Asian Crisis," NBER Working Papers 7102, National Bureau of Economic Research, Inc.
  21. Frederic S. Mishkin, 1990. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Working Papers 3400, National Bureau of Economic Research, Inc.
  22. Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
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