IDEAS home Printed from https://ideas.repec.org/p/wbk/wbrwps/2685.html
   My bibliography  Save this paper

Monetary policy strategies for Latin America

Author

Listed:
  • Mishkin, Frederic S.
  • Savastano, Miguel A.

Abstract

The authors examine possible monetary policy strategies for Latin America that may help lock in the gains the region attained in the fight against inflation in the 1990s. Instead of focusing the debate about the conduct of monetary policy on whether the nominal exchange rate should be fixed or flexible, the focus should be on whether the monetary policy regime appropriately constrains discretion in monetary policymaking. Three basic frameworks deserve serious discussion as possible long-run strategies for monetary policy in Latin America. The authors examine the advantages and disadvantages of a hard exchange-rate peg, monetary targeting, and inflation targeting, in light of monetary policy's recent track record in several Latin American countries, looking for clues about which of the strategies might be best suited to economies in the region. The answer: It depends on the country's institutional environment. Some countries appear not to have the institutions to constrain monetary policy if discretion is allowed. In those countries, there is a strong argument for hard pegs, including full dollarization, that allow little or no discretion to monetary authorities. In countries such as Chile, which can constrain discretion, inflation targeting is likely to produce a monetary policy that keeps inflation low yet appropriately copes with domestic and foreign shocks. Monetary targeting as a strategy for Latin America is not viable because of the likely instability of the relationship between inflation and monetary aggregates, of which there is ample international evidence. No monetary strategy can solve the basic problems that have existed in Latin American economies for a long time. The authors welcome the recent move in Latin American countries toward inflation targeting, but say no policy will succeed unless government policies also create the right institutional environment.

Suggested Citation

  • Mishkin, Frederic S. & Savastano, Miguel A., 2001. "Monetary policy strategies for Latin America," Policy Research Working Paper Series 2685, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2685
    as

    Download full text from publisher

    File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2001/10/27/000094946_01101604055756/Rendered/PDF/multi0page.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    2. Bennett T. McCallum, 1996. "Inflation Targeting in Canada, New Zealand, Sweden, the United Kingdom, and in General," NBER Working Papers 5579, National Bureau of Economic Research, Inc.
    3. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156, National Bureau of Economic Research, Inc.
    4. Frederic S. Mishkin, 1996. "Understanding Financial Crises: A Developing Country Perspective," NBER Working Papers 5600, National Bureau of Economic Research, Inc.
    5. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    6. Rousseau, Peter L. & Sylla, Richard, 2005. "Emerging financial markets and early US growth," Explorations in Economic History, Elsevier, vol. 42(1), pages 1-26, January.
    7. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    8. Calvo, Guillermo A. & Vegh, Carlos A., 1999. "Inflation stabilization and bop crises in developing countries," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 24, pages 1531-1614, Elsevier.
    9. 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.
    10. Mishkin, Frederic S., 1999. "Lessons from the Asian crisis," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 709-723, August.
    11. Guillermo A. Calvo & Carlos A. Végh, 1994. "Inflation Stabilization And Nominal Anchors," Contemporary Economic Policy, Western Economic Association International, vol. 12(2), pages 35-45, April.
    12. Ben Bernanke & Frederic Mishkin, 1992. "Central Bank Behavior and the Strategy of Monetary Policy: Observations from Six Industrialized Countries," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 183-238, National Bureau of Economic Research, Inc.
    13. Mishkin, Frederic S., 1998. "International Experiences With Different Monetary Policy Regimes," Seminar Papers 648, Stockholm University, Institute for International Economic Studies.
    14. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A Price Target for U.S. Monetary Policy? Lessons from the Experience with Money Growth Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 77-146.
    15. Frederic S. Mishkin, 1991. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Chapters, in: Financial Markets and Financial Crises, pages 69-108, National Bureau of Economic Research, Inc.
    16. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    17. 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.
    18. repec:imf:imfops:154 is not listed on IDEAS
    19. Paul R. Masson & Miguel A. Savastano & Sunil Sharma, 2019. "The Scope for Inflation Targeting in Developing Countries," World Scientific Book Chapters, in: Macroeconomic Modelling and Monetary and Exchange Rate Regimes, chapter 10, pages 331-383, World Scientific Publishing Co. Pte. Ltd..
    20. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 73-96, Fall.
    21. Estrella, Arturo & Mishkin, Frederic S., 1997. "Is there a role for monetary aggregates in the conduct of monetary policy?," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 279-304, October.
    22. Vittorio Corbo, 1998. "Reaching One-Digit Inflation: The Chilean Experience," Journal of Applied Economics, Universidad del CEMA, vol. 1, pages 123-163, November.
    23. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
    24. Oscar Landerretche & Felipe Morandé & Klaus Schmidt-Hebbel, 1999. "Inflation Targets and Stabilization in Chile," Working Papers Central Bank of Chile 55, Central Bank of Chile.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mishkin, F.S., 1998. "International Experiences with Different Monetary Policy Regimes," Papers 648, Stockholm - International Economic Studies.
    2. 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?," Working Papers Central Bank of Chile 101, Central Bank of Chile.
    3. Mishkin, Frederic S., 1999. "International experiences with different monetary policy regimesMishkin, 1998b). Any views expressed in this paper are those of the author only and not those of Columbia University or the National Bur," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 579-605, June.
    4. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    5. Vittorio Corbo, 2002. "Monetary Policy in Latin America in the 90s," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 6, pages 117-166, Central Bank of Chile.
    6. d'Amico, Stefania & Mira Farka, 2003. "The Fed and Stock Market: A Proxy and Instrumental Variable Identification," Royal Economic Society Annual Conference 2003 52, Royal Economic Society.
    7. Meixing DAI, 2009. "On the role of money growth targeting under inflation targeting regime," Working Papers of BETA 2009-11, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    8. Nejla Adanur Aklan & Mehmet Nargelecekenler, 2008. "Taylor Rule in Practice: Evidence from Turkey," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(2), pages 156-166, May.
    9. Sylvia Staudinger, 2000. "Inflation Targeting versus Nominal Income Targeting," CESifo Working Paper Series 301, CESifo.
    10. Guillermo A. Calvo & Frederic S. Mishkin, 2003. "The Mirage of Exchange Rate Regimes for Emerging Market Countries," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 99-118, Fall.
    11. Frederic S. Mishkin, 2007. "Will Monetary Policy Become More of a Science?," NBER Working Papers 13566, National Bureau of Economic Research, Inc.
    12. Takatoshi Ito & Frederic S. Mishkin, 2006. "Two Decades of Japanese Monetary Policy and the Deflation Problem," NBER Chapters, in: Monetary Policy with Very Low Inflation in the Pacific Rim, pages 131-202, National Bureau of Economic Research, Inc.
    13. Frederic S Mishkin, 1997. "Strategies for Controlling Inflation," RBA Annual Conference Volume (Discontinued), in: Philip Lowe (ed.),Monetary Policy and Inflation Targeting, Reserve Bank of Australia.
    14. Hartmann, Daniel, 2001. "Taylor-Regel und amerikanische Geldpolitik," Violette Reihe: Schriftenreihe des Promotionsschwerpunkts "Globalisierung und Beschäftigung" 17/2001, University of Hohenheim, Carl von Ossietzky University Oldenburg, Evangelisches Studienwerk.
    15. Jesus Garcia-Iglesias, 2007. "How the European Central Bank decided its early monetary policy?," Applied Economics, Taylor & Francis Journals, vol. 39(7), pages 927-936.
    16. repec:kap:iaecre:v:14:y:2008:i:2:p:156-166 is not listed on IDEAS
    17. Caporale, Guglielmo Maria & Helmi, Mohamad Husam & Çatık, Abdurrahman Nazif & Menla Ali, Faek & Akdeniz, Coşkun, 2018. "Monetary policy rules in emerging countries: Is there an augmented nonlinear taylor rule?," Economic Modelling, Elsevier, vol. 72(C), pages 306-319.
    18. Chaouech, Olfa, 2015. "Taylor rule in practice: Evidence from Tunisia," MPRA Paper 74628, University Library of Munich, Germany, revised 16 Oct 2016.
    19. Shawn Chen‐Yu Leu & Jeffrey Sheen, 2006. "Asymmetric Monetary Policy in Australia," The Economic Record, The Economic Society of Australia, vol. 82(s1), pages 85-96, September.
    20. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202, National Bureau of Economic Research, Inc.
    21. Kuttner, Kenneth N. & Posen, Adam S., 1999. "Does talk matter after all? Inflation targeting and central bank behavior," CFS Working Paper Series 1999/04, Center for Financial Studies (CFS).

    More about this item

    Keywords

    Financial Intermediation; Payment Systems&Infrastructure; Fiscal&Monetary Policy; Economic Theory&Research; Banks&Banking Reform; Financial Intermediation; Banks&Banking Reform; Economic Stabilization; Economic Theory&Research; Macroeconomic Management;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:2685. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/dvewbus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Roula I. Yazigi (email available below). General contact details of provider: https://edirc.repec.org/data/dvewbus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.