Inflation targeting in dollarized economies, Issues 2006-2157
Leonardo Leiderman, Rodolfo Maino, Eric Parrado, International Monetary Fund. Monetary and Financial Systems Dept
International Monetary Fund, 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 2.5 percent aggregate demand balance sheet effects Bank of Bolivia Bank of Peru bank reserves BCRP rate 142 bilateral exchange rate cause BCRP rate cause deposit rate cause lending rate central banks Central Reserve Bank Chile and Colombia competitiveness targeting countercyclical countries CPI Inflation direct foreign exchange exchange market intervention exchange rate depreciation exchange rate fluctuations exchange rate pass-through exchange rate shocks exchange rate volatility fear of floating FFCT FFIT regime Figure 6a foreign exchange market Granger cause BCRP Granger cause deposit Granger cause lending highly dollarized economies implementation inflation targeting interest rate shocks International Financial Statistics monetary transmission nominal exchange rate operational target output gap Peru and Bolivia Peru's policy rate primary final target rate 72 rate of crawl real bilateral exchange real effective exchange real exchange rate Recent Monetary Experiences Response of CPI risk premium S.D. DLRERCH Innovation sample transmission mechanism variability