Inflation Targeting in Brazil, Chile, and Mexico: Performance, Credibility, and the Exchange Rate

Inflation Targeting in Brazil, Chile, and Mexico: Performance, Credibility, and the Exchange Rate I nflation targeting is the new kid on the block of monetary regimes.Since New Zealand first adopted the regime in 1990, a growing number of industrial and developing countries have followed suit.To date, nineteen countries have anchored their monetary policy to explicit quantitative inflation goals.Even the Federal Reserve has suggested introducing inflation targeting in the United States, and academics have urged the Bank of Japan to adopt inflation targeting in an effort to jumpstart the Japanese economy. 1 The European Central Bank has adopted a two-pillar system based on both inflation and monetary targets, but many observers argue that in practice it is very close to a pure inflation targeting regime.Latin America is part of this world trend.After recording the highest inflation in the world in the 1980s, the region implemented a substantial departure from past policies starting in 1990.The results have been dramatic.In the 1980s four countries recorded average inflation rates above 200 percent a year, and the average regional inflation rate stood at 145 percent.In contrast, most Latin American economies currently maintain low, single-digit inflation rates close to industrial-country levels.Price stabilization has been achieved in the region under different monetary and exchange regimes, ranging from exchange-rate-based stabilization and dollarization to inflation targeting in combination with floating exchange