Description

Close to fifteen years into the implementation of fully - fledged inflation targeting in Chile, this paper briefly reviews the operation of this framework. When faced with aggregate demand fluctuations, a credible inflation - targeting framework allows conduct ing countercyclical monetary policy through its effect on the term structure of interest rates and the exchange rate. In the short run, exchange - rate movements may have an impact on inflation, but this is a one - time phenomenon to the extent that there is c redibility that the inflation target will be reached in the medium term. Evidence is presented that inflation targets have allowed a more efficient macroeconomic performance in various economies, and the monetary and exchange rate adjustment to external sh ocks is illustrated with two examples for Chile, in 2003 - 2004 and 2009 - 2010. The paper concludes with some reflections on the situation in 2013 - 2014, drawing attention to the way the Chilean economy has been able to accommodate global rebalancing through a more expansionary monetary policy and the depreciation of the peso, in the context of medium - term inflation expectations aligned with the target.