MarketWatch

Dec 1, 2001

Inflation Targeting Works

Brazil and Chile are both neighbors of Argentina and both have floating exchange rates. Their currencies have suffered heavily from the effects of the crisis next door. Chile can pin the blame on Argentina more credibly than Brazil, which has been weakened by policy errors and a mounting debt burden. Still, the similarity in inflation and exchange patterns in Brazil and Chile is striking. The Brazilian real has lost just over a quarter of its value since January 1999, whereas Chile's peso has fallen by one-third. Yet inflation is remarkably low. Brazil, with a long-standing tradition of heavy inflation, has seen average prices rise only 20% since the beginning of 1999, shortly before it adopted an inflation-targeting monetary policy. In Chile, which has used inflation targeting since 1990, prices rose by half as much since January 1999.

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