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Inflation Targeting in Financially Stable Economies: Has it been Flexible Enough?

Author

Listed:
  • Mauricio Calani
  • Kevin Cowan
  • Pablo García S.
Abstract
The events surrounding the financial crisis and recession of 2008-2009 required significant policy responses by central banks. For formal inflation targeters (IT) a natural question arises about whether IT frameworks were flexible enough to address this unprecedented policy environment. In this paper we tackle this question by assessing the policy responses to the crisis of nine IT central banks that did not face systemic problems in their banking or financial systems. We first document substantial deviations of actual policy responses from prescriptions of conventional monetary policy reaction functions, beginning in the second half of 2008. Although several explanations for the deviations are offered, highlighting the extreme challenges at the time, we can more easily reconcile the findings with a decline in the persistence of monetary policy, again, in all cases. Second, we document the banks’ non-monetary-policy measures adopted at the time, and estimate their impact on local money markets (both in local currency and US dollars) and on exchange rates. While these measures helped broadly to normalize markets, firm conclusions on the effectiveness of specific measures are elusive, owing to the difficulty in comparing the different mix of measures adopted across countries and the significant heterogeneity in specific economies’ responses to these non-monetary policy measures.

Suggested Citation

  • Mauricio Calani & Kevin Cowan & Pablo García S., 2010. "Inflation Targeting in Financially Stable Economies: Has it been Flexible Enough?," Working Papers Central Bank of Chile 587, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:587
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    Cited by:

    1. Ortiz, Marco, 2015. "Choques de colas anchas y política monetaria," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 29, pages 17-31.
    2. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
    3. Luis Felipe Céspedes & Roberto Chang & Diego Saravia, 2011. "Monetary Policy under Financial Turbulence: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.),Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 1, pages 001-021, Central Bank of Chile.
    4. Rodrigo Caputo & Juan Pablo Medina & Claudio Soto, 2011. "The Financial Accelerator under Learning and the Role of Monetary Policy," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.),Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 7, pages 185-218, Central Bank of Chile.
    5. Mr. Yan Carriere-Swallow & Mr. Pablo Garcia-Silva, 2013. "Capital Account Policies in Chile Macro-financial considerations along the path to liberalization," IMF Working Papers 2013/107, International Monetary Fund.
    6. Berstein Solange & Mario Marcel, 2019. "El Sistema Financiero en Chile: Lecciones de la Historia Reciente," Economic Policy Papers Central Bank of Chile 67, Central Bank of Chile.
    7. Ortiz, Marco, 2014. "Fat-Tailed Shocks and the Central Bank Reaction," Working Papers 2014-002, Banco Central de Reserva del Perú.
    8. Benjamín García, 2016. "Zero Lower Bound Risk and Long-Term Inflation in a Time Varying Economy," Working Papers Central Bank of Chile 796, Central Bank of Chile.
    9. J. Felipe Córdova, 2010. "Conventional Calibration Versus EDF Calibration," Working Papers Central Bank of Chile 589, Central Bank of Chile.
    10. Mr. Yan Carriere-Swallow & Mr. Luis Ignacio Jácome & Mr. Nicolas E Magud & Alejandro M. Werner, 2016. "Central Banking in Latin America: The Way Forward," IMF Working Papers 2016/197, International Monetary Fund.

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