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Inflation Targeting in Financially Stable Economies: Has it been Flexible Enough?

  • Mauricio Calani C.
  • Kevin Cowan L.
  • Pablo García S.

The financial crisis and recession of 2008-2009 required significant policy responses by central banks. For formal inflation targeters (IT), a natural question arises about whether IT frameworks were flexible enough to address this unprecedented policy environment. We address this question by assessing the policy responses to the crisis of nine IT central banks that did not face systemic problems in their financial systems. We document substantial deviations of actual policy responses from prescriptions of conventional monetary policy reaction functions, a fact which we more easily reconcile with a decline in the persistence of monetary policy. We also provide evidence on the overall impact of non-monetarypolicy measures on the exchange rate and money market.

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File URL: http://www.bcentral.cl/eng/studies/economia-chilena/2010/ago/recv13n2ago2010pp11-50.pdf
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Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 13 (2010)
Issue (Month): 2 (August)
Pages: 11-50

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Handle: RePEc:chb:bcchec:v:13:y:2010:i:2:p:11-50
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