Latin America’s Monetary-Policy Test

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 do essentially the same thing.

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.

But the actual practice of all six central banks bears only a passing resemblance to this orthodoxy. To begin with – and not surprisingly for export-led economies – the real exchange rate is also an (implicit) target for monetary policy. As a result, interventions in foreign-exchange markets have been lasting and widespread, even in countries like Chile and Mexico, which explicitly vowed to let their currencies float freely. Some countries – most notably Brazil – have also used taxes on international capital flows and other kinds of controls in an effort to guide the currency’s value.

To continue reading, please log in or enter your email address.

To read this article from our archive, please log in or register now. After entering your email, you'll have access to two free articles every month. For unlimited access to Project Syndicate, subscribe now.

required

By proceeding, you are agreeing to our Terms and Conditions.

Log in

http://prosyn.org/t8SSM0I;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.