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Is Inflation Targeting destabilizing? Lessons from Latin America

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  • Emiliano Libman

Abstract

This paper argues that several aspects of the productive structure and themacroeconomic policies of Latin American countries, when combined with a Taylor Rule,may produce too much output volatility and a bias towards real exchange rate overvaluation.Relaying on a simple Aggregate Demand – Aggregate Supply model, we show that this is alikely outcome when: a) the real interest rate elasticity of demand is low; b) depreciationshave strong contractionary effects; and c) the exchange rate pass-through is relatively large.These conditions imply that depreciations are contractionary and a have a strong effect oninflation. JEL Classification: E31; E52; E58.

Suggested Citation

  • Emiliano Libman, 2022. "Is Inflation Targeting destabilizing? Lessons from Latin America," Brazilian Journal of Political Economy, Center of Political Economy, vol. 42(2), pages 304-326.
    • Handle: RePEc:ekm:repojs:v:42:y:2022:i:2:p:304-326:id:2325
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    File URL: https://centrodeeconomiapolitica.org.br/repojs/index.php/journal/article/view/2325/2270
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    More about this item

    Keywords

    Inflation Targeting; contractionary depreciations; fear of floating;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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