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Inflation Targeting in Brazil, Chile, and Mexico: Performance, Credibility, and the Exchange Rate

Klaus Schmidt-Hebbel () and Alejandro M. Werner ()

Economía Journal, 2002, vol. Volume 2 Number 2, issue Spring 2002, 31-90

Abstract: Inflation targeting (IT) has been adopted by a growing number of countries and Latin America has been part of this world trend. This paper reviews the recent IT experiences of Brazil, Chile, and Mexico, applying a common empirical framework to the three country cases. Inflation performance under IT and its associated output costs are reported and compared favorably to a control group of other countries. The paper analyzes ways by which IT has contributed to strengthen credibility: the effect of targets on inflation expectations and on actual inflation, the low influence of inflation shocks on core inflation, and the decline in inflation forecast errors. Do the three inflation targeters exhibit fear of floating? No, considering their relatively large exchange rate volatility and moderate international reserve holdings. No, considering strongly declining inflation-to-devaluation passthrough coefficients and little evidence for monetary policy reaction to exchange rate shocks. Yes, considering the frequency and intensity of sterilized exchange interventions in comparison to other inflation targeters that float more cleanly.

Keywords: inflation; credibility; floating regimes; Brazil; Chile; Mexico (search for similar items in EconPapers)
JEL-codes: E31 E37 (search for similar items in EconPapers)
Date: 2002
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