Inflation Targeting in Chile

Inflation Targeting in Chile had been welcomed in the year 1990 for lowering their inflation rate so as to join the world trend. In fact Chile was the first Latin American country, and second in the world, who accepted inflation targeting.

Inflation Targeting in Chile had been welcomed in the year 1990 for lowering their inflation rate so as to join the world trend. In fact Chile was the first Latin American country, and second in the world, who accepted inflation targeting.

Reasons behind the affirmation of Inflation Targeting in Chile:

1. Chile had been lamenting from many financial crisis, e.g high inflation rate, for a long time. But at the beginning of the 90s the Central Bank of Chile had got enough independence to make the monetary policies and decisions. So to improve the plausibility of the monetary policies, the Bank had started inflation targeting in that country.
    
2. From 1991 to 2001 the yearly growth rate of the economy in Chile was only 5.7%. The rate of inflation was not stable as well. So the adoption of inflation targeting to build a better economic framework and transparent monetary policy was very much needed.

 

Effect of Inflation Targeting on the Bank’s Credibility:

1. The Central Bank has to achieve high payoffs that has been promised to maintain or prove it’s credibility. It has to be compatible with the incentives and also should try to strive against inflation to materialize the promises. Bank’s credibility can be measured by the amount of deviation of the expected inflation from the predicted target.
    
2. Proper inflation targeting will advance the Bank to prove it’s commitment to the public because, then, the inflation rate will not shift from the assumed target.
    
3. The Central Bank also wants to keep the value of Chile’s currency stable for better price stability. This will also improves Bank’s credibility further. By inflation targeting the Bank can keep a steady price level.
    
4. The result of better credibility is that the Central Bank of Chile can accelerate their ‘trade-off’ between the inflation stabilization process and output.

Conclusion:

The introduction of inflation targeting has influenced the market dynamics of Chile . Price stability has been achieved and also the Bank has improved it’s credibility.The desire of a transparent monetary policy has been fulfilled which will play a significant role in Chile’s economic structure. Finally, the divergence of inflation from the proposed target has been abstained consistently to a large extent without sacrificing on the output level.