Inflation Targets and Stabilization in Chile

Oscar Landerretche, Felipe Morandé () and Klaus Schmidt-Hebbel

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: Chile was among the first countries to adopt an inflation target. Its long inflation history had led to widespread backward-looking indexation in goods, labour, and financial markets as well as in policy instruments. While indexation exacerbates inflation inertia, this paper provides evidence that adoption of inflation targets by an autonomous Central Bank since 1990 has made possible a regime change reflected in gradual inflation convergence toward international levels. Assessing Chile’s targeting experience in an international context and analyzing the conduct of monetary policy in Chile provides the background for understanding its recent stabilization experience. A simple dynamic model illustrates the role and macro effects of inflation targeting in a highly indexed open economy. VAR estimations for inflation, inflation targets, and related macro variables support the notion that the introduction of forward-looking inflation targets has contributed to breaking inflation expectations, paving the way for Chile’s convergence to sustained lower inflation and reducing the influence of indexation albeit most indexation mechanisms are still in place.

Date: 1999-12
New Economics Papers: this item is included in nep-lam, nep-mon and nep-pke
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:55

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