Inflation Targeting in Financially Stable Economies: Has it been Flexible Enough?

Mauricio Calani, Kevin Cowan () and Pablo García S.
Authors registered in the RePEc Author Service: Pablo Garcia Silva

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: The events surrounding the financial crisis and recession of 2008-2009 required significant policy responses by central banks. For formal inflation targeters (IT) a natural question arises about whether IT frameworks were flexible enough to address this unprecedented policy environment. In this paper we tackle this question by assessing the policy responses to the crisis of nine IT central banks that did not face systemic problems in their banking or financial systems. We first document substantial deviations of actual policy responses from prescriptions of conventional monetary policy reaction functions, beginning in the second half of 2008. Although several explanations for the deviations are offered, highlighting the extreme challenges at the time, we can more easily reconcile the findings with a decline in the persistence of monetary policy, again, in all cases. Second, we document the banks’ non-monetary-policy measures adopted at the time, and estimate their impact on local money markets (both in local currency and US dollars) and on exchange rates. While these measures helped broadly to normalize markets, firm conclusions on the effectiveness of specific measures are elusive, owing to the difficulty in comparing the different mix of measures adopted across countries and the significant heterogeneity in specific economies’ responses to these non-monetary policy measures.

Date: 2010-07
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (5)

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Related works:
Chapter: Inflation Targeting in Financially Stable Economies: Has it Been Flexible Enough? (2011)
Journal Article: Inflation Targeting in Financially Stable Economies: Has it been Flexible Enough? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:587

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