By Naked Keynes (Guest Blogger)

Several Latin American economies (Brazil, Chile, Colombia, Mexico, Peru) adopted full-fledged inflation targeting regimes at the end of the 1990s and beginning of the 2000s. Others are following suit including the Costa Rica, Dominican Republic, Guatemala, Paraguay and more recently Argentina.Inflation targeting is defined by its proponents as a monetary policy framework, rather than iron clad rule as monetary targeting, consisting in the public announcement of numerical targets (a point inflation rate, a range or a point with a tolerance range) acknowledging that price stability is the fundamental and hierarchical goal of monetary policy and a commitment to transparency and accountability. Transparency means that the monetary authorities must communicate their targets, forecasts of inflation, decisions on monetary policy and the motivation for their decisions. Accountability means that the monetary authorities are responsible for attaining the announced objectives and subject to “public scrutiny for changes in their policy or deviations from their targets.” Full fledge inflation targeters practice ‘flexible’ inflation targeting entails pursuing a ‘gradualist’ approach to the achievement of monetary policy objectives.The Latin American experience underscores some major limitations of inflation targeting.

By Naked Keynes (Guest Blogger)The latest IMF World Economic Outlook (April 2016) projects stagnation in World Growth (3.1% and 3.2% in 2015 and 2016) both in advanced economies (4.0% and 4.1% in 2015 and 2016) and emerging market and developing economies (1.9% and 1.9% for 2015 and 2016). The prospects for 2017 are hardly any better with an estimate of 3.5% for global output and continuing stagnation of advanced economies. But things could get worse.The current outlook scenario depends on very optimistic assumptions which as mentioned in the report (p. 18) are “subject to sizable downside risks.” These include: (i) improved conditions for economies under stress; (ii) successful rebalancing in China; (iii) improved economic activity in commodity exporters; (iv) resilient growth (whatever this may mean) in emerging and developing economies other than commodity exporters.The stagnation and possible reduction in world growth is not traced to transitory shocks or disruptions, or god forbid to demand conditions. It is rather traced directly to the production function (the core of mainstream economic theory) and more precisely to a decline in potential GDP levels and growth due to population aging, slow growing investment and total factor productivity (See also IMF, WEO, April 2015).