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

In: Monetary Policy under Financial Turbulence

  • Mauricio Calani

    (University of Pennsylvania)

  • Kevin Cowan

    (Central Bank of Chile)

  • Pablo García S.

    (International Monetary Fund)

The events surrounding 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. In this paper we tackle this question by assessing the policy responses to the crisis of nine IT central banks that did not face systemic problems in their banking or financial systems. We first document substantial deviations of actual policy responses from prescriptions of conventional monetary policy reaction functions, beginning in the second half of 2008. Although several explanations for the deviations are offered, highlighting the extreme challenges at the time, we can more easily reconcile the findings with a decline in the persistence of monetary policy, again, in all cases. Second, we document the banks’ non-monetary-policy measures adopted at the time, and estimate their impact on local money markets (both in local currency and US dollars) and on exchange rates. While these measures helped broadly to normalize markets, firm conclusions on the effectiveness of specific measures are elusive, owing to the difficulty in comparing the different mix of measures adopted across countries and the significant heterogeneity in specific economies’ responses to these non-monetary policy measures.

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This chapter was published in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.) Monetary Policy under Financial Turbulence, , chapter 01, pages 283-368, 2011.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v16c09pp283-368.
Handle: RePEc:chb:bcchsb:v16c09pp283-368
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  1. Cho-Hoi Hui & Hans Genberg & Tsz-Kin Chung, 2009. "Funding Liquidity Risk and Deviations from Interest-Rate Parity During the Financial Crisis of 2007-2009," Working Papers 0913, Hong Kong Monetary Authority.
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  12. Ian Nield, 2008. "Evolution of the Reserve Bank’s liquidity facilities," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 71, December.
  13. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2009. "Do central bank liquidity facilities affect interbank lending rates?," Working Paper Series 2009-13, Federal Reserve Bank of San Francisco.
  14. Moura, Marcelo L. & de Carvalho, Alexandre, 2010. "What can Taylor rules say about monetary policy in Latin America?," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 392-404, March.
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  17. Mark R. Stone & Etienne B. Yehoue & Kotaro Ishi, 2009. "Unconventional Central Bank Measures for Emerging Economies," IMF Working Papers 09/226, International Monetary Fund.
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