Inflation Targeting in Dollarized Economies, Issues 2006-2157
International Monetary Fund, Jun 1, 2006 - Business & Economics - 20 pages
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.
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0.00 BCRP rate 0.00 Deposit rate balance sheet effects Banco Central Bank of Chile Bank of Peru bank reserves BCRP rate 142 cause BCRP rate cause deposit rate cause lending rate Central Bank Central de Chile Central Reserve Bank Chile and Colombia countercyclical CPI Inflation Diciembre 2005 Diciembre Documentos de Trabajo dolarización emerging market economies exchange market intervention exchange rate depreciation exchange rate fluctuations Exchange Rate Innovation exchange rate pass-through exchange rate regimes exchange rate volatility F-Statistic fear of floating FFCT FFIT regime Figure foreign exchange market Granger cause BCRP Granger cause deposit Granger cause lending highly dollarized economies impact implementation inflation targeting Interbank rate international reserves metas de inflación monetary policy monetary transmission nominal exchange rate NPLs operational target Peru and Bolivia Peru BCRP policy rate policy regime primary final target rate of crawl Reaction Functions real exchange rate Response of CPI S.D. Real Exchange Supply Shocks transmission mechanism variability