Inflation targeting in Latin America

Abstract

In this Thesis we assess Inflation Targeting with a unique treatment and control group of strictly Latin American countries. We attempt to answer two questions: What have been the effects of Inflation Targeting on inflation in Latin America? And, how has Inflation Targeting affected the behavior of Latin American central banks? We evaluate time series inflation data and compare how inflation mean, volatility, and persistence differ under Inflation Targeting. We find that Inflation Targeters and Non-Inflation Targeters exhibit similar improvements in inflation performance and there is no robust, statistically significant difference between their inflation performances. In addition, we estimate a small Dynamic Stochastic General Equilibrium model to determine whether economic behavior within an economy fundamentally changes under Inflation Targeting. Although Inflation Targeting central banks appear to be if anything, slightly more aggressive in responding to inflation than Non-Inflation Targeting central banks, this has not resulted in more forward looking inflation expectations by economic agents.