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Inflation Targets and Stabilization in Chile

Author

Listed:
  • Oscar Landerretche
  • Felipe Morandé
  • Klaus Schmidt-Hebbe

Abstract

Chile was among the first countries to adopt an inflation target. Its long inflation history had led to widespread backward-looking indexation in goods, labour, and financial markets as well as in policy instruments. While indexation exacerbates inflation inertia, this paper provides evidence that adoption of inflation targets by an autonomous Central Bank since 1990 has made possible a regime change reflected in gradual inflation convergence toward international levels. Assessing Chile’s targeting experience in an international context and analyzing the conduct of monetary policy in Chile provides the background for understanding its recent stabilization experience. A simple dynamic model illustrates the role and macro effects of inflation targeting in a highly indexed open economy. VAR estimations for inflation, inflation targets, and related macro variables support the notion that the introduction of forward-looking inflation targets has contributed to breaking inflation expectations, paving the way for Chile’s convergence to sustained lower inflation and reducing the influence of indexation albeit most indexation mechanisms are still in place.

Suggested Citation

  • Oscar Landerretche & Felipe Morandé & Klaus Schmidt-Hebbe, 1999. "Inflation Targets and Stabilization in Chile," Working Papers Central Bank of Chile 55, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:55
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    References listed on IDEAS

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    1. Guy Debelle & Miguel A Savastano & Paul R Masson & Sunil Sharma, 1998. "Inflation Targeting as a Framework for Monetary Policy," IMF Economic Issues 15, International Monetary Fund.
    2. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
    3. Miguel A Savastano & Paul R Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
    4. Erica Groshen & Mark Schweitzer, 1999. "Identifying Inflation's Grease and Sand Effects in the Labor Market," NBER Chapters,in: The Costs and Benefits of Price Stability, pages 273-314 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Mishkin, Frederic S, 1998. "The Dangers of Exchange-Rate Pegging in Emerging-Market Countries," International Finance, Wiley Blackwell, vol. 1(1), pages 81-101, October.
    2. Marco Vega, 2006. "Skewed policy responses and IT in Latin America," Computing in Economics and Finance 2006 61, Society for Computational Economics.
    3. 300, 2004. "Persistence and the Role of Exchange Rate and Interest Rate Inertia in Monetary Policy," Working Papers Central Bank of Chile 300, Central Bank of Chile.
    4. Naz, Farah & Mohsin, Asma & Zaman, Khalid, 2012. "Exchange rate pass-through in to inflation: New insights in to the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2205-2221.
    5. Mishkin, Frederic S., 1998. "International Experiences With Different Monetary Policy Regimes," Seminar Papers 648, Stockholm University, Institute for International Economic Studies.
    6. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging-Market Countries," American Economic Review, American Economic Association, vol. 90(2), pages 105-109, May.
    7. Luis A.V. Catão & Adrian Pagan, 2011. "The Credit Channel and Monetary Transmission in Brazil and Chile: A Structured VAR Approach," Central Banking, Analysis, and Economic Policies Book Series,in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.), Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 5, pages 105-144 Central Bank of Chile.
    8. Ferya Kadioglu & Nilufer Ozdemir & Gokhan Yilmaz, 2000. "Inflation Targeting in Developing Countries," Discussion Papers 0006, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    9. Rodrigo Caputo, 2004. "Exchange Rates and Monetary Policy in Open Economies: The Experience of Chile in the Nineties," Working Papers Central Bank of Chile 272, Central Bank of Chile.

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