Inflation Targeting in Latin America

56 Pages Posted: 11 Jan 2014

See all articles by Adolfo Barajas

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department

Roberto Steiner

Universidad de los Andes, Colombia - Department of Economics

Leonardo Villar

Fedesarrollo

Cesar Pabon

Fedesarrollo

Date Written: January 2014

Abstract

Estimation of conventional Taylor rules for Brazil, Chile, Colombia and Peru shows that central banks increase their repo rate in response to increases in the output gap and, except in Peru, to deviations of inflation expectations from target. Using a Markov-Switching methodology, it is found that, in the presence of external shocks, Chile, Colombia and Peru temporarily abandoned their conventional reaction function. The Taylor Rule is expanded and variables are included related to exchange rate misalignments and to domestic credit developments; limited evidence is found that countries have used some form of integrated inflation targeting. There is strong evidence that intervention in F/X markets is determined by exchange rate misalignments rather than by exchange rate volatility and that most countries seem particularly concerned with a strong currency. Central banks appear to have pursued an inflation objective using a standard Taylor rule and an exchange rate objective through interventions in the F/X market.

JEL Classification: E31, E52, E61

Suggested Citation

Barajas, Adolfo and Steiner, Roberto and Villar, Leonardo and Pabon, Cesar, Inflation Targeting in Latin America (January 2014). IDB Working Paper No. IDB-WP-473. Available at SSRN: https://ssrn.com/abstract=2377644 or http://dx.doi.org/10.2139/ssrn.2377644

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4152 (Phone)
202-623-6070 (Fax)

Roberto Steiner

Universidad de los Andes, Colombia - Department of Economics ( email )

Carrera 1a No. 18A-10
Santafe de Bogota, AA4976
Colombia
+571 341 2240 (Phone)
+571 281 5771 (Fax)

Leonardo Villar

Fedesarrollo

Calle 78 No 9-91
Santafe de Bogota, 75074
Colombia

Cesar Pabon

Fedesarrollo

Calle 78 No 9-91
Santafe de Bogota, 75074
Colombia

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