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A Decade of Inflation Targeting in Chile: Developments, Lessons, and Challenges

  • Felipe Morandé

Chile was among the first countries in the world to adopt a monetary framework based on an explicit, publicly announced, annual inflation target, when the term "inflation targeting" had not been even formalized. An inflationary past suggested the combination of tough inflation targeting parameters (to enhance Central Bank’s reputation) and a gradual transition from moderate high inflation to a long run goal of 3% (the ex post policy horizon –or implicit targeting horizon- was nine! years). Reaching the long run goal rate in 1999 and an indisputable reputation as inflation-averse has allowed the Central Bank of Chile to move more into the flexibility side of the credibility-flexibility trade-off. Also, having a third objective in the form of a asymmetric threshold current account deficit did imply in a few episodes setting aside the implicit output stabilizatio goal in the short run. This in the end may have implied a more aggressive and conservative monetary policy than otherwise. However, a lot of attention has been paid to reduce business cycle fluctuations and the attempt has been successful overall.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 115.

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Date of creation: Nov 2001
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Handle: RePEc:chb:bcchwp:115
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  1. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know?," NBER Working Papers 8397, National Bureau of Economic Research, Inc.
  2. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  3. Medina, J.P. & Valdes, R., 2000. "Optimal Monetary Policy Rules Under Inflation Range Targeting," Papers 61, Cambridge - Risk, Information & Quantity Signals.
  4. Stephen Cecchetti & Michael Ehrmann, 2000. "Does Inflation Targeting Increase Output volatility? An International Comparison of Policy Maker's Preferences and Outcomes," Working Papers Central Bank of Chile 69, Central Bank of Chile.
  5. Vittorio Corbo, 1998. "Reaching One-Digit Inflation: The Chilean Experience," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 123-163, November.
  6. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
  7. Batini, Nicoletta & Nelson, Edward, 2001. "Optimal horizons for inflation targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 891-910, June.
  8. 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.
  9. Mahadeva, Lavan & Gabriel Sterne, 2002. "Inflation Targets as a Stabilisation Device," Royal Economic Society Annual Conference 2002 134, Royal Economic Society.
  10. Klaus Schmidt-Hebbel & Luis Serven, 2000. "Policy Shifts and External Shocks in Chile Under Rational Expectations," Econometric Society World Congress 2000 Contributed Papers 1098, Econometric Society.
  11. Laurence Ball & N. Gregory Mankiw & David Romer, 1988. "The New Keynsesian Economics and the Output-Inflation Trade-off," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 1-82.
  12. Calvo, Guillermo A. & Mendoza, Enrique, 1998. "Empirical Puzzles of Chilean Stabilization Policy," Working Papers 98-02, Duke University, Department of Economics.
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