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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
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  1. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  3. 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.
  4. 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.
  5. Jordi Galí & Mark Gertler & J. David López-Salido, 2000. "European Inflation Dynamics," Banco de Espa�a Working Papers 0020, Banco de Espa�a.
  6. Adam Posen, 1995. "Central bank independence and disinflationary credibility: a missing link?," Staff Reports 1, Federal Reserve Bank of New York.
  7. Jeannine Bailliu & Eiji Fujii, 2004. "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation," Working Papers 04-21, Bank of Canada.
  8. Dornbusch, Rudiger, 1977. "Inflation, Capital, and Deficit Finance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 9(1), pages 141-50, February.
  9. 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.
  10. 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.
  11. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  12. Ball, Laurence, 1995. "Disinflation with imperfect credibility," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 5-23, February.
  13. Vittorio Corbo, 1998. "Reaching One-Digit Inflation: The Chilean Experience," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 123-163, November.
  14. Stephen G. Cecchetti & Stefan Krause, 2006. "Inflation Targeting versus Price-Path Targeting: Looking For Improvements," Working Papers Central Bank of Chile 399, Central Bank of Chile.
  15. Ghysels, E. & Guay, A. & Hall, A., 1995. "Predictive Tests for Structural Change with Unknown Breakpoint," Cahiers de recherche 9524, Universite de Montreal, Departement de sciences economiques.
  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.
  17. 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.
  18. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
  19. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
  20. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  21. 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.
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