Inflation targeting in open economies: the contradictions of determinacy and stability

Esteban Perez Caldentey and Matías Vernengo

Chapter 3 in Monetary Policy Challenges in Latin America, 2023, pp 34-58 from Edward Elgar Publishing

Abstract: Since 1999, more than half of Latin American countries have put in practice inflation targeting regimes with the objective of maintaining price stability within a low-inflation environment. Building on previous work, we argue that the adoption of this monetary regime was the result of a policy shift that began with the Washington Consensus, and that materialized sequentially in increased financial openness and greater exchange rate flexibility, leading eventually to the implementation of inflation targeting. We further sustain that, in the case of an open economy, the use of inflation targeting leads to incoherent and contradictory results that severely question its alleged superiority over other monetary frameworks. Finally, we posit the need for comprehensive regulatory frameworks to deal with the complex dynamics and transmission mechanisms that characterize economies that have a high degree of financial openness, such as those of Latin America.

Keywords: Development Studies; Economics and Finance; Politics and Public Policy (search for similar items in EconPapers)
Date: 2023
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