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.
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