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Credibility and Inflation Targeting in Chile

In: Monetary Policy under Inflation Targeting

  • Luis F. Céspedes

    (Banco Central de Chile)

  • Claudio Soto

    (Banco Central de Chile)

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 indexation based on past inflation has decreased over time. We also show that the passthrough from the exchange rate to traded goods inflation has decreased in recent years. We argue that these changes are related to an 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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This chapter was published in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Monetary Policy under Inflation Targeting, , chapter 14, pages 547-578, 2007.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v11c14pp547-578.
Handle: RePEc:chb:bcchsb:v11c14pp547-578
Contact details of provider: Postal: Casilla No967, Santiago
Phone: (562) 670 2000
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  1. Hutchison, M M & Walsh, C E, 1998. "The Output-Inflation Tradeoff and Central Bank Reform: Evidence from New Zealand," Economic Journal, Royal Economic Society, vol. 108(448), pages 703-25, May.
  2. Christopher J. Erceg and Andrew T. Levin, 2001. "Imperfect Credibility and Inflation Persistence," Computing in Economics and Finance 2001 19, Society for Computational Economics.
  3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  4. Galí, Jordi & Gertler, Mark & López-Salido, J David, 2001. "European Inflation Dynamics," CEPR Discussion Papers 2684, C.E.P.R. Discussion Papers.
  5. Ball, Laurence, 1995. "Disinflation with imperfect credibility," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 5-23, February.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
  7. Eiji Fuji & Jeannine Bailliu, 2004. "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation," Computing in Economics and Finance 2004 135, Society for Computational Economics.
  8. 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.
  9. 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.
  10. Ghysels, E. & Guay, A. & Hall, A., 1995. "Predictive Tests for Structural Change with Unknown Breakpoint," Cahiers de recherche 9524, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  11. Stephen G. Cecchetti & Stefan Krause, 2007. "Inflation Targeting versus Price-Path Targeting: Looking for Improvements," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 8, pages 265-290 Central Bank of Chile.
  12. Ghysels, E & Hall, A., 1988. "A Test For Structural Stability Of Euler Conditions Parameters Estimated Via The Generalized Methods Of Moments Estimators," Cahiers de recherche 8837, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  13. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
  14. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  15. Vittorio Corbo, 1998. "Reaching One-Digit Inflation: The Chilean Experience," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 123-163, November.
  16. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  17. Adam Posen, 1995. "Central bank independence and disinflationary credibility: a missing link?," Staff Reports 1, Federal Reserve Bank of New York.
  18. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
  19. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  20. 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.
  21. Dornbusch, Rudiger, 1977. "Inflation, Capital, and Deficit Finance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 141-50, February.
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