Monetary Policy Frameworks for Emerging Markets
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Monetary Policy Frameworks for Emerging Markets

Edited by Gill Hammond, Ravi Kanbur and Eswar Prasad

Financial globalization has made monetary policy formulation in emerging market economies increasingly complicated. This timely set of studies looks at the turmoil in global financial markets, which coupled with volatile inflation poses serious challenges for central banks in these countries. Featuring papers from the research frontier and front-line policymakers in developing and emerging market economies, the book addresses questions such as ‘What monetary policy framework is most suitable for these countries to confront the new challenges while they continue to open up to trade and financial flows?’, ‘What are the linkages between monetary stability and financial stability?’ and ‘Is inflation targeting or a fixed exchange rate regime preferable for developing and emerging markets?’
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Chapter 3: Implementation of Inflation Targets in Emerging Markets

José De Gregorio


José De Gregorio* INTRODUCTION 3.1 The main objective of the great majority of central banks in the world is controlling inflation. In some cases financial stability is an added objective; in others, employment or economic development objectives are also included. In the case of Chile there are two explicit objectives, namely, price stability and the ‘normal functioning of external and internal payments’. The latter objective, taken from the central bank’s charter, corresponds to financial stability,1 which involves two dimensions. The first is the stability of the domestic financial system, which in simple terms may be described as avoiding financial distress and dealing with it when it occurs. The second is the normal functioning of the system of payments to and from the rest of the world, which in simple terms means avoiding balance-of-payments crises and difficulties of access to international financial markets. To address the price stability objective, Chile follows an inflationtargeting scheme. Chile is part of a worldwide trend in which a large and growing number of countries have adopted this approach to conducting their monetary policy (International Monetary Fund, 2005, Chapter 4). In an inflation-targeting regime, the central bank publicly announces a numerical objective regarding inflation, which may be either a specific number or a range. Although the target range itself is quite clearly defined, generally the percentage of the time that the central bank expects inflation to lie within the range is not made explicit, and of course one cannot expect inflation always to stay within...

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