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Inflation Targeting in Latin America

  • Vittorio Corbo
  • Klaus Schmidt-Hebbel

This paper analyzes Latin America’s recent experience with the use of inflation targeting (IT) while the region has made substantial progress toward eradicating high inflation. The paper assesses the implementation and results of inflation targeting in Latin America from a broad perspective. It starts by reviewing the issues relevant for the choice of exchange-rate regimes and monetary frameworks, documenting the evolution of exchange rate and monetary regimes in Latin America during the last two decades. Then it describes the Latin American and world samples of inflation targeters and compares their performance to non-targeters, focusing on their success in meeting inflation targets, their output sacrifice in achieving low inflation, and their output volatility. A more detailed analysis of five IT experiences follows for Brazil, Chile, Colombia, Mexico, and Peru, with reference to the design of IT in the world sample of inflation targeters. The paper concludes by focusing on the dynamics of inflation reduction in the longest IT experience in the region (the case of Chile), evaluating how IT has affected inflation expectations and hence the effectiveness of monetary policy, using a battery of alternative model estimations and simulations.

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Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 230.

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Date of creation: 2002
Date of revision:
Handle: RePEc:ioe:doctra:230
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  1. Felipe Morandé & Klaus Schmidt-Hebbel, 2000. "Chile's Peso: Better Than (Just) Living with the Dollar?," Working Papers Central Bank of Chile 68, Central Bank of Chile.
  2. Andrés Elberg & Vittorio Corbo & José Tessada, 1999. "Monetary Policy in Latin America: Underpinnings and Procedures," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 36(109), pages 897-927.
  3. Atish R. Ghosh & Anne-Marie Gulde & Jonathan D. Ostry & Holger C. Wolf, 1997. "Does The Nominal Exchange Rate Regime Matter?," Working Papers 97-09, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Mishkin, Frederic S. & Savastano, Miguel A., 2001. "Monetary policy strategies for Latin America," Journal of Development Economics, Elsevier, vol. 66(2), pages 415-444, December.
  5. Guillermo A. Calvo & Carlos A. Vegh, 1999. "Inflation Stabilization and BOP Crises in Developing Countries," NBER Working Papers 6925, National Bureau of Economic Research, Inc.
  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. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
  8. Sebastian Edwards & Carlos A. Vegh, 1997. "Banks and Macroeconomics Disturbances under Predetermined Exchange Rates," NBER Working Papers 5977, National Bureau of Economic Research, Inc.
  9. Vittorio Corbo, 1998. "Reaching One-Digit Inflation: The Chilean Experience," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 123-163, November.
  10. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
  11. David Hargreaves & C John McDermott, 1999. "Issues relating to optimal currency areas: theory and implications for New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, September.
  12. Vittorio Corbo & Klaus Schmidt-Hebbel, 2002. "Inflation Targeting in Latin America," Documentos de Trabajo 230, Instituto de Economia. Pontificia Universidad Católica de Chile..
  13. Stephen G. Cecchetti, 1998. "Policy rules and targets: framing the central banker's problem," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 1-14.
  14. Corbo, Vittorio, 1985. "International Prices, Wages and Inflation in an Open Economy: A Chilean Model," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 564-73, November.
  15. 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.
  16. Andrew Berg & Paolo Mauro & Michael Mussa & Alexander K. Swoboda & Esteban Jadresic & Paul R. Masson, 2000. "Exchange Rate Regimes in an Increasingly Integrated World Economy," IMF Occasional Papers 193, International Monetary Fund.
  17. Frederic S Mishkin, 1997. "Strategies for Controlling Inflation," RBA Annual Conference Volume, in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
  18. Bruno, Michael, 1978. "Exchange Rates, Import Costs, and Wage-Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 379-403, June.
  19. Sebastian Edwards, 1993. "Exchange Rates, Inflation and Disinflation: Latin American Experiences," NBER Working Papers 4320, National Bureau of Economic Research, Inc.
  20. Maurice Obstfeld & Kenneth Rogoff, 1995. "The mirage of fixed exchange rates," Working Papers in Applied Economic Theory 95-08, Federal Reserve Bank of San Francisco.
  21. Sebastian Edwards & Miguel A. Savastano, 1999. "Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?," NBER Working Papers 7228, National Bureau of Economic Research, Inc.
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