Beyond Inflation Targeting

Beyond Inflation Targeting

Assessing the Impacts and Policy Alternatives

Edited by Gerald A. Epstein and A. Erinc Yeldan

This book, written by an international team of economists, develops concrete, country specific alternatives to inflation targeting, the dominant policy framework of central bank policy that focuses on keeping inflation in the low single digits to the virtual exclusion of other key goals such as employment creation, poverty reduction and sustainable development.

Chapter 8: Alternatives to Inflation Targeting in Mexico

Luis Miguel Galindo and Jaime Ros

Subjects: development studies, development economics, economics and finance, development economics

Extract

Luis Miguel Galindo and Jaime Ros1 INTRODUCTION 8.1 Inflation targeting has become increasingly popular over the past decade. As a nominal anchor for monetary policy with a public and explicit commitment to maintain economic discipline, inflation targeting is being promoted as a general framework in order to reduce and control the inflation rate, improve inflation predictability, accountability and transparency, reduce the expected inflation variability (Sheridan, 2001), improve the output-inflation trade-off (Clifton et al., 2001), help solve the dynamic consistency problem and even reduce output variability (Svensson, 1997, 1998). Several Latin American countries such as Chile (1990), Peru (1994), Mexico (1999), Brazil (1999) and Colombia (1999) have moved their monetary regimes to an inflation targeting framework (Corbo et al., 2002; Schmidt-Hebbel and Werner, 2002). There are also a number of concerns regarding the adoption of an inflation targeting regime. There is an important concern about the ability of the central bank to control the inflation rate, in particular under the presence of fiscal or external shocks. There are also fundamental doubts about the economic consequences of an inflation targeting regime. For example, Ball and Sheridan (2003) argue that the reduction of inflation and the reduction in output variability in the OECD countries is a general trend that is not necessarily related to the instrumentation of inflation targeting and that this kind of regime does not affect output variability. Furthermore, Newman and von Hagen (2002) claim that the evaluation of inflation targeting has been misleading because it has not properly considered the...

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