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Latin America’s Monetary-Policy Test

SANTIAGO – On matters of sex, the citizens of mostly Roman Catholic Latin America often proclaim one thing and practice something very different. On matters of monetary policy, Latin central banks often also fail to live up to what they preach.

In theory, monetary authorities in Brazil, Chile, Colombia, Mexico, Peru, and Uruguay adhere to the modern orthodoxy of inflation targeting, which holds that price stability is the main (perhaps the only) goal of monetary policy, the short-term interest rate should be the only instrument used to achieve the inflation target, and the exchange rate ought to float freely.