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Is Inflation Targeting Still On Target?

  • Luis Felipe Céspedes
  • Roberto Chang
  • Andrés Velasco

This paper reviews the recent experience of a half-dozen Latin American inflation-targeting (IT) nations. We document repeated and large deviations from the standard IT framework: exchange market interventions have been lasting and widespread; the real exchange rate has often become a target of policy, though this target is seldom made explicit; a range of other non-conventional policy tools, especially changes in reserve requirements but occasionally also taxes or restrictions on international capital movements, also came into common use. As in developed nations, during the 2008-2009 crisis issues of liquidity provision took center stage. We also attempt a first evaluation of the emerging modified framework of monetary policy. In general terms, the new approach seems to have been effective, at the very least since the region weathered the crisis reasonably well. But also, and perhaps more importantly, many questions remain about the desirability of non-conventional monetary policies in Latin America.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18570.

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Date of creation: Nov 2012
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Publication status: published as Is Inflation Targeting Still on Target? The Recent Experience of Latin America† Luis Felipe Céspedes1,*, Roberto Chang2 andAndrés Velasco3 Article first published online: 27 AUG 2014 DOI: 10.1111/infi.12047 International Finance Volume 17, Issue 2, pages 185–208, Summer 2014
Handle: RePEc:nbr:nberwo:18570
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  1. Aoki, Kosuke, 2001. "Optimal monetary policy responses to relative-price changes," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 55-80, August.
  2. Vasco Cúrdia & Michael Woodford, 2008. "Credit frictions and optimal monetary policy," Working Paper Research 146, National Bank of Belgium.
  3. Bianca De Paoli, 2004. "Monetary Policy and Welfare in a Small Open Economy," CEP Discussion Papers dp0639, Centre for Economic Performance, LSE.
  4. Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies.
  5. Zenon Quispe & Renzo Rossini, 2011. "Monetary policy during the global financial crisis of 2007-09: the case of Peru," BIS Papers chapters, in: Bank for International Settlements (ed.), The global crisis and financial intermediation in emerging market economies, volume 54, pages 299-316 Bank for International Settlements.
  6. José Sidaoui & Manuel Ramos-Francia & Gabriel Cuadra, 2011. "Global liquidity, capital flows and challenges for policymakers: the Mexican experience," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 239-260 Bank for International Settlements.
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