A simple model of some possible long-run adverse effects of inflation targeting

Abstract

ABSTRACT In Latin America, Brazil, Chile, Colombia, Mexico and Peru, have been using Inflation Targeting for at least two decades, and although there were significant improvements in social indicators, macroeconomic results have been mixed. In particular, the real exchange rate has been much more volatile and growth was significantly slower in Brazil and Mexico. In accordance with these facts, we sketch a simple New Consensus open economy model with hysteresis and we show that a policy that targets inflation disregarding the effects on the real exchange rate may have negative long-run effects.