Exchange rate pass-through and inflation targets in Chile (original) (raw)
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Flexible Exchange Rate with Inflation Targeting in Chile: Experience and Issues
SSRN Electronic Journal, 2000
The first five years of the flexible exchange rate and inflation targeting regime in Chile have shown positive results. Inflation is under control, the exchange rate has moved with the external conditions, monetary policy has been countercyclical and the cycle has apparently smoothened. Even though exchange rate volatility has increased, as expected with a flexible regime, this has also happened in other countries with similar characteristics. This increased volatility has lower extreme real exchange rate valuations than in the past, as is also seen in other countries with alternative exchange rate regimes. Important progress in derivatives market deepening, as well in a lower pass-through from the exchange rate to inflation, have contributed to increasing the credibility and feasibility of the current policy framework, while minimizing potential costs derived from that framework.
Monetary Policy and Inflation Targeting in Chile
2000
Inflation targeting is the new kid on the block of monetary regimes. 2 Since the early 1990s, seven industrial countries and a few emerging economies, Chile among them, have adopted inflation targeting as the cornerstone of their monetary policy. This chapter reviews the conduct of monetary policy in Chile and the role of inflation targeting in the country's gradual convergence toward price stability. 3
Is the Exchange Rate Pass-Through into Import Prices Declining? Evidence from Chile
Emerging Markets Finance and Trade, 2012
Several empirical studies have found that the exchange rate pass-through (ERPT) to import prices is not complete has declined in many countries during the 90s. In this paper we carry out a reexamination of these findings using a unique database of disaggregated import prices both at the border and the wholesale level for Chile. Our results do not support previous evidence. We find a complete and not declining ERPT in the long-run both pricing levels of Chilean imports. We extend previous evidence by showing that in the short-run wholesale prices seem to be less sensitive to exchange rate variations. In addition, we find weak evidence of asymmetric pass-through from appreciations versus depreciations for the aggregate import indexes.
Analyzing the Exchange Rate Pass-through in Mexico: Evidence Post Inflation Targeting Implementation
Ensayos sobre Política Económica, 2014
Domestic price stability is a key element to consider in the design of monetary policy, and the fact that exchange rate changes affect inflation dynamics makes the understanding of the exchange rate A B S T R A C T This paper presents an analysis of the exchange rate pass-through mechanism for the Mexican economy after the formal adoption of inflation targeting policy. In particular, this research work analyzes how a change in the nominal exchange rate depreciation is transmitted to domestic prices along the distribution chain of pricing. The analysis is carried out using a recursive Structural Vector Autorregression with exogenous variables (recursive SVAR-X) model, which aims at the estimation of structural impulse-response-functions as a tool to analyze the degree and speed of the effect of exchange rate depreciation changes on domestic prices. Additionally, variance decompositions are computed to capture the relative importance of exchange rate depreciation shocks in explaining inflation fluctuations. Our results show that, for the period of analysis (after the formal adoption of inflation targeting in Mexico), the exchange rate pass-through to consumer prices is quite small and fast and exchange rate surprises are not relevant to explain consumer price inflation variation.
Exchange Rate Policy in Chile: From the Band to Floating and Beyond
2002
With the exemption of adopting a foreign currency, Chile has experienced virtually all the menu of options of exchange rate policies in the last 40 years. The quest for a reasonable exchange rate policy has been inspired in part by the different goals that, through time, policy makers have attempted to achieve with this policy. After almost of decade of co-existence of inflation targeting and an exchange rate band, in 1999 the Central Bank of Chile gave up the exchange rate band and replaced it with a policy of floating. This paper confronts two main questions: (a) Why was the band abandoned and, by the same token, why it took so long to do it and (b) How has the floating regime worked so far? This last question involves accounting for the possible appearance of "fear of floating" by the macroeconomic authorities, as well as evaluating the regime in three critical issues: exchange rate passthrough to domestic prices, exchange rate volatility and balance sheet effects. In the final section, the paper illustrates the operation of the exchange rate system in the face of regional contagion effects.
Credibility and Inflation Targeting in Chile1
2000
In this paper we present some new evidence that indicates that the inflationary dynamics for the Chilean economy have changed in recent years. We show that price rigidity has increased while at the same time the degree of indexation based on past inflation has decreased over time. We also show that the pass-through from exchange rate to traded good inflation
Price-setting and exchange rate pass-through: theory and evidence
Price adjustment and monetary policy, 2003
There has been a considerable recent debate on the causes of low pass-through from exchange rates to consumer prices. This paper develops a simple model of a small open economy in which exchange rate pass-through is determined by the frequency of price changes of importing firms. But this, in turn, is determined by the monetary policy rule of the central bank. 'Looser' monetary policy, which implies a higher mean inflation rate, and a higher volatility of the exchange rate, will lead to more frequent price changes and a higher rate of pass-through. The model implies that there should be a positive, but non-linear, relationship between pass-through and mean inflation, and a positive relationship between pass-through and exchange rate volatility. In a sample of 122 countries, this is strongly supported by the data. Our conclusion is that, at least partly, low exchange rate pass-through is a result of short-term price rigidities.
Procedia Economics and Finance, 2016
Most of the emerging market economy in 90s faced to grave crisis. After these crises, the monetary policies of emerging market economies gave up to use exchange rates as an anchor. For such markets inflation targeting became a new policy. Exchange rates' overshooting effects in the markets and consequential troubles are important causes of these political changes. The study aims at comparatively measuring the pass through impacts of exchange rates to the prices in Asia Pacific, Latin (South) America, and Turkey economies, which implement inflation targeting regime, but have the variable traits in dollarization and inflation experiences For calculating of pass-through effects from exchange rates to domestic prices, the model that is used in the study has five variable factors. Analysis of model is base of VAR approach. Due to cross section series are used in addition to time series, Panel VAR model has been used. Upon obtained findings, it can be said that pass-through effect in Asia Pacific economies is lower than pass-through effect in Latin America and Turkey. This result also complies with the examined pass-through effect literature. †