Is Inflation Targeting destabilizing? Lessons from Latin America

Emiliano Libman ()

Brazilian Journal of Political Economy, 2022, vol. 42, issue 2, 304-326

Abstract: This paper argues that several aspects of the productive structure and themacroeconomic policies of Latin American countries, when combined with a Taylor Rule,may produce too much output volatility and a bias towards real exchange rate overvaluation.Relaying on a simple Aggregate Demand – Aggregate Supply model, we show that this is alikely outcome when: a) the real interest rate elasticity of demand is low; b) depreciationshave strong contractionary effects; and c) the exchange rate pass-through is relatively large.These conditions imply that depreciations are contractionary and a have a strong effect oninflation. JEL Classification: E31; E52; E58.

Keywords: Inflation Targeting; contractionary depreciations; fear of floating (search for similar items in EconPapers)
Date: 2022
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