Inflation Targeting in Dollarized Economies

By Leonardo Leiderman, Rodolfo Maino, Eric Parrado

June 1, 2006

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Format: Chicago

Leonardo Leiderman, Rodolfo Maino, and Eric Parrado. Inflation Targeting in Dollarized Economies, (USA: International Monetary Fund, 2006) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The shift to inflation targeting has contributed to the relatively low inflation observed in some emerging market economies although, as noted by many economists, the preconditions required for a successful implementation were not in place. The existence of managed exchange rate regimes, a narrow base of domestic nominal financial assets, the lack of market instruments to hedge exchange rate risks, together with fear of floating and dollarization, have been stressed as factors that might weaken the efficacy of monetary policy. By examining various aspects of monetary transmission and policy formulation in two highly dollarized economies (Peru and Bolivia) vis-à-vis two economies with low levels of dollarization (Chile and Colombia), we found that, while dollarization imposes differences in both the transmission capacity of monetary policy and its impact on real and financial sectors, it does not preclude the use of inflation targeting as a policy regime.

Subject: Exchange rates, Foreign exchange intervention, Inflation, International reserves, Real exchange rates

Keywords: Exchange rate, Inflation targeting, Interest rate, Peru, WP

Publication Details

Pages:

20
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/157
Stock No:

WPIEA2006157
ISBN:

9781451864175
ISSN:

1018-5941

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