5

Monetary Regime Transition in the Emerging World

SANTIAGO – Is inflation targeting – the rule that most of the world’s major central banks (though not the United States Federal Reserve) use to set interest rates – in its death throes? Many analysts seem to think so.

Mark Carney, currently Governor of the Bank of Canada, has not even taken over his new job at the helm of the Bank of England, yet he has already announced that he might change the BoE’s policy anchor. In Japan, the Liberal Democrats won December’s general election after having promised a more expansionary monetary policy. And in the US, the Fed has announced that it will keep interest rates low until unemployment reaches 6.5%.

None of this is as new as it seems. Among rich countries, inflation targeting has been on its way out since the 2008-2009 financial crisis. The large-scale asset purchases carried out by the European Central Bank, for example, have little to do with any definition of inflation targeting.

But inflation targeting has also been losing its hold on policymakers in emerging-market economies. Starting in the 1990’s, central banks in Brazil, Chile, Mexico, Colombia, Peru, South Africa, South Korea, Indonesia, Thailand, and Turkey adopted varieties of the scheme. But things changed with the global financial crisis. In joint research with Roberto Chang and Luis Felipe Céspedes, we show that all inflation-targeting central banks in Latin America have used a range of non-conventional policy tools, including currency-market interventions and changes in reserve requirements. Again, this is a far cry from the textbook version of inflation targeting.