Argentina and Inflation Targeting. ¿Can it be implemented? - Some considerations regarding the Brazilian Experience-

Countries use different type of “anchors” with who intend to make the agents expectations to converge to a specified level of inflation. Those anchors could be either based on the exchange rate or some kind of monetary policy. Modern trend is to use Inflation Targeting rather than the traditional monetary aggregates. Countries that adopt Inflation Targeting could be classified as EIT (Eclectic Inflation Targeters), FFIT (Full Fledge Inflation Targeters) and ITL (Inflation Targeting Light). Argentina, if it walks through an IT regime, would be a very particular case, since there is no background that a country in default, with its financial system almost destroyed and a very low degree of credibility on its institutions, have had the capability of successfully implemented this kind of policies. A first issue that should be considered to adopt this monetary regime is to obtain a level of fiscal equilibrium that will allow the agents to believe in the long term solvency of the country. A second issue is reconstruction of credibility of the agents in the monetary authority, in such a way that its analysis would tend to a convergence of expectations and minimize doubts on the reasons the Central Bank should make interventions in the market. A third issue is the creation of an area of economic studies in the Central Bank that will allow the monetary authority to analyze the transmition mechanisms of monetary policy to prices. A fourth issue is renegotiating the public services contracts in which the definition of a new model for adjusting tarif's could be a good idea to avoid linking them to price indexes, but to link them to the cost structure of the companies, due to their impact on the structure of the price indexes usually used as reference for IT. A last issue that cannot be forgiven is that the argentine economy is, in fact, partially dollarized, because currency used for major transactions is US dollar, and also operate, at least with a majority of sectors linked to goods production, a foreign currency standard (US dollar price adjustment) in commercial contracts. The first three issues show us that Argentina seems to be very far of implementing a FFIT policy and with some difficulties to be considered an ITL. It seems that it does not seem an advantage to make public yet the new anchor to avoid consequences of a hypothetically change of system. The fourth issue introduces the need of a difficult and complex negotiation on public services prices in terms of its technical aspects that also has an extreme political sensitiveness. Finally, the last issue shows that it could be necessary to introduce into the predictive models an à la Peru bias, where the economy works under a heavily dollarized component, which is quite more superior than what it happens in Brazil.