Inflation Targeting in Chile

Abstract

Chile was the second country in the world to adopt inflation targeting (IT), setting its first annual target in September 1990. IT was used as a device to bring inflation gradually down to a stationary 3% level. This paper analyzes four main questions, exploiting Chile’s long IT experience. Is Chile’s experience different from that of other countries that have adopted IT during the 1990s? Has IT contributed to monetary policy credibility in Chile? Does the monetary authority exhibit fear of floating? Is the Central Bank’s monetary policy function consistent with the goals of IT? The evidence reported in this paper shows that credibility grew as inflation targets were attained, that there is little “fear of floating,” and that monetary policy has evolved according to the strengthening of IT and attainment of stationary inflation.

Keywords: Inflation targeting; Monetary policy; Exchange rate policy; Taylor rules

JEL Classification: E31; E52; E61