Inflation Targeting in Dollarized Economies

22 Pages Posted: 26 Jul 2006

See all articles by Leonardo Leiderman

Leonardo Leiderman

Independent

Rodolfo Maino

International Monetary Fund (IMF)

Eric Parrado

Central Bank of Chile

Date Written: June 2006

Abstract

The shift to inflation targeting has contributed to the relatively low inflation observed in some emerging market economies although, as noted by many economists, the preconditions required for a successful implementation were not in place. The existence of managed exchange rate regimes, a narrow base of domestic nominal financial assets, the lack of market instruments to hedge exchange rate risks, together with fear of floating and dollarization, have been stressed as factors that might weaken the efficacy of monetary policy. By examining various aspects of monetary transmission and policy formulation in two highly dollarized economies (Peru and Bolivia) vis-à-vis two economies with low levels of dollarization (Chile and Colombia), we found that, while dollarization imposes differences in both the transmission capacity of monetary policy and its impact on real and financial sectors, it does not preclude the use of inflation targeting as a policy regime.

Keywords: Monetary policy, inflation targeting, dollarization

JEL Classification: E31, E4, E5

Suggested Citation

Leiderman, Leonardo and Maino, Rodolfo and Parrado, Eric, Inflation Targeting in Dollarized Economies (June 2006). IMF Working Paper, Vol. , pp. 1-22, 2006. Available at SSRN: https://ssrn.com/abstract=920249

Leonardo Leiderman (Contact Author)

Independent ( email )

No Address Available

Rodolfo Maino

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Eric Parrado

Central Bank of Chile ( email )

Agustinas 1180
Santiago
Chile

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