On the Credibility of Inflation-Targeting Regimes in Latin America

Abstract

Inflation targeting has become popular in emerging economies. Eight countries in Latin America adopted this regime and were successful in bringing inflation down. However, continuing success depends on the credibility of the target. We interpret credibility as how tightly inflation expectations are anchored and develop a methodology to test the response to shocks. Inflation targets gained credibility over time, but when inflation rises above target, credibility suffers. Moreover, at the end of the sample, there is evidence of de-anchoring.   JEL Codes: E31, E52, E58