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Inflation Targeting And Monetary Policy Credibility In Chile

Listed author(s):
  • Luis F. Céspedes C.
  • Claudio Soto G.

In this paper we present new evidence on the recent changes of the inflationary dynamics for the Chilean economy. We show that price rigidity has increased while the degree of indexation based on past inflation has decreased over time. We also show that passthrough from the exchange rate to traded goods inflation has decreased in recent years. We argue that these changes are related to enhanced credibility of the monetary policy that has improved the tradeoff faced by the Central Bank. Consistently with this hypothesis, we show that the policy rule that characterizes the behavior of the Central Bank of Chile has become more aggressive in fighting inflation deviations from the target, and also more forward-looking.

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File URL: http://si2.bcentral.cl/public/pdf/revista-economia/2006/dic/Vol9N6diciembre2006pp53_70.pdf
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Article provided by Central Bank of Chile in its journal Economía Chilena.

Volume (Year): 9 (2006)
Issue (Month): 3 (December)
Pages: 53-70

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Handle: RePEc:chb:bcchec:v:9:y:2006:i:3:p:53-70
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  15. Adam S. Posen, 1995. "Central bank independence and disinflationary credibility: a missing link?," Staff Reports 1, Federal Reserve Bank of New York.
  16. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
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  18. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April.
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  25. Oscar Landerretche & Fernando Lefort & Rodrigo O. Valdés, 2002. "Causes and Consequences of Indexation: A Review of the Literature," Central Banking, Analysis, and Economic Policies Book Series, in: Fernando Lefort & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Serie (ed.), Indexation, Inflation and Monetary Policy, edition 1, volume 2, chapter 2, pages 019-064 Central Bank of Chile.
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  29. Luis F. Céspedes & Claudio Soto, 2005. "Credibility and Inflation Targeting in an Emerging Market: Lessons from the Chilean Experience," International Finance, Wiley Blackwell, vol. 8(3), pages 545-575, December.
  30. Sargent, Thomas J., 1999. "A primer on monetary and fiscal policy," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1463-1482, October.
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