Monetary policy alternatives for Latin America

During the 1990s, many Latin American countries began to address their problems with recession, inflation, and unemployment through dramatic economic reforms and monetary policy strategies that included exchange rate pegs, monetary aggregate targeting, or inflation targeting. Inflation targeting, in particular, had begun to lower inflation rates and to stabilize or increase real economic growth in countries such as New Zealand, Canada, and the United Kingdom. But has inflation targeting proved as successful for Latin American economies? ; This article describes the recent history of monetary policy in Latin America, focusing on the strategies implemented by Argentina, Panama, Ecuador, El Salvador, Mexico, Peru, Chile, Colombia, and Brazil. For the most part their policies were successful: the inflation rate was lower in the 1990s than during the previous decade while average real economic growth more than doubled. But financial crises in recent years have highlighted the region's continuing vulnerability to international capital market volatility and other external and domestic shocks. ; The author believes that the Latin American experience suggests some lessons about various policies' relative costs and benefits and the importance of the underlying economic and political environment in determining the ultimate success of alternative monetary policy regimes. She concludes that fiscal discipline, policy credibility, and the role of the exchange rate are critical factors that must be addressed to ensure the sustainability of economic policy.