A Decade of Inflation Targeting in Chile: Developments, Lessons, and Challenges

Chile was among the first countries in the world to adopt a monetary framework based on an explicit, publicly announced, annual inflation target, when the term "inflation targeting" had not been even formalized. An inflationary past suggested the combination of tough inflation targeting parameters (to enhance Central Bank’s reputation) and a gradual transition from moderate high inflation to a long run goal of 3% (the ex post policy horizon –or implicit targeting horizon- was nine! years). Reaching the long run goal rate in 1999 and an indisputable reputation as inflation-averse has allowed the Central Bank of Chile to move more into the flexibility side of the credibility-flexibility trade-off. Also, having a third objective in the form of a asymmetric threshold current account deficit did imply in a few episodes setting aside the implicit output stabilizatio goal in the short run. This in the end may have implied a more aggressive and conservative monetary policy than otherwise. However, a lot of attention has been paid to reduce business cycle fluctuations and the attempt has been successful overall.