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Inflation Targeting, Reserves Accumulation, and Exchange Rate Management in Latin America

  • Roberto Chang

    ()

This paper examines whether central banks in Latin America have implemented conventional inflation targeting (IT) prescriptions, with a focus on foreign exchange intervention and official reserves accumulation policies. To this end, the paper reviews the experiences of Brazil, Chile, Colombia, and Peru, and finds significant departures from the dominant theory of IT. Foreign exchange intervention has often been used to prevent excessive financial volatility, bubbles, and panics. Ongoing patterns of reserves accumulation have been the outcome of an effort to build "war chests" against speculative attacks and, more recently, of a fight against real exchange appreciation. Possible justifications of the discrepancies between conventional IT theory and practice are discussed and generally found unsatisfactory.

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Paper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 487.

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Handle: RePEc:bdr:borrec:487
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  1. José De Gregorio & Andrea Tokman & Rodrigo Valdés, 2005. "Flexible Exchange Rate with Inflation Targeting in Chile: Experience and Issues," Research Department Publications 4427, Inter-American Development Bank, Research Department.
  2. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
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  4. Leonardo Leiderman & Rodolfo Maino & Eric Parrado, 2006. "Inflation Targeting in Dollarized Economies," IMF Working Papers 06/157, International Monetary Fund.
  5. José Darío Uribe & Jorge Toro, 2005. "Foreign exchange market intervention in Colombia," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 139-49 Bank for International Settlements.
  6. Backus, David K. & Kehoe, Patrick J., 1989. "On the denomination of government debt : A critique of the portfolio balance approach," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 359-376, May.
  7. Guillermo A. Calvo, 2006. "Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort," NBER Working Papers 12788, National Bureau of Economic Research, Inc.
  8. Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2001. "External constraints on monetary policy and the financial accelerator," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  9. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
  10. Adrián Armas & Francisco Grippa, 2005. "Targeting Inflation in a Dollarized Economy: The Peruvian Experience," IDB Publications (Working Papers) 6827, Inter-American Development Bank.
  11. Jose De Gregorio & Andrea Tokman R., 2004. "Overcoming Fear of Floating: Exchange Rate Policies in Chile," Working Papers Central Bank of Chile 302, Central Bank of Chile.
  12. Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers 1998, C.E.P.R. Discussion Papers.
  13. Piti Disyatat & Gabriele Galati, 2005. "The effectiveness of foreign exchange intervention in emerging market countries," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 97-113 Bank for International Settlements.
  14. Arminio Fraga & Ilan Goldfajn & André Minella, 2004. "Inflation Targeting in Emerging Market Economies," NBER Chapters, in: NBER Macroeconomics Annual 2003, Volume 18, pages 365-416 National Bureau of Economic Research, Inc.
  15. Bofinger, Peter & Wollmershäuser, Timo, 2003. "Managed floating as a monetary policy strategy," Munich Reprints in Economics 20206, University of Munich, Department of Economics.
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  17. Stijn van Nieuwerburgh & Michael Kumhof, 2005. "Monetary Policy in an Equilibrium Portfolio Balance Model," 2005 Meeting Papers 851, Society for Economic Dynamics.
  18. repec:rus:hseeco:124089 is not listed on IDEAS
  19. Romain Ranciere & Olivier Jeanne, 2006. "The Optimal Level of International Reserves for Emerging Market Countries; Formulas and Applications," IMF Working Papers 06/229, International Monetary Fund.
  20. Frederic Mishkin & Klaus Schmidt-Hebbel, 2002. "A Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know?," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 4, pages 171-220 Central Bank of Chile.
  21. Ben Bernanke & Mark Gertler, 2000. "Monetary Policy and Asset Price Volatility," NBER Working Papers 7559, National Bureau of Economic Research, Inc.
  22. Hernando Vargas H., 2005. "Exchange Rate Policy and Inflation Targeting in Colombia," Research Department Publications 4425, Inter-American Development Bank, Research Department.
  23. Afonso Bevilaqua & Rodrigo Azevedo, 2005. "Provision of FX hedge by the public sector: the Brazilian experience," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 119-26 Bank for International Settlements.
  24. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
  25. Grippa, Francisco & Gondo, Rocio, 2006. "Intervenciones cambiarias," Revista Moneda, Banco Central de Reserva del Perú, issue 133, pages 5-12.
  26. Hernando Vargas H., 2005. "Exchange Rate Policy and Inflation Targeting in Colombia," IDB Publications (Working Papers) 6828, Inter-American Development Bank.
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