Is Inflation Targeting destabilizing? Lessons from Latin America

Vol. 42 No. 2 (2022)

Apr-Jun / 2022
Published May 5, 2022

How to Cite

Libman, Emiliano. 2022. “Is Inflation Targeting Destabilizing? Lessons from Latin America”. Brazilian Journal of Political Economy 42 (2):304-26.

Is Inflation Targeting destabilizing? Lessons from Latin America

Emiliano Libman
Centre for the Study of State and Society, Buenos Aires, Argentina.
Brazilian Journal of Political Economy, Vol. 42 No. 2 (2022), Apr-Jun / 2022, Pages 304-326


This paper argues that several aspects of the productive structure and the
macroeconomic policies of Latin American countries, when combined with a Taylor Rule,
may produce too much output volatility and a bias towards real exchange rate overvaluation.
Relaying on a simple Aggregate Demand – Aggregate Supply model, we show that this is a
likely outcome when: a) the real interest rate elasticity of demand is low; b) depreciations
have strong contractionary effects; and c) the exchange rate pass-through is relatively large.
These conditions imply that depreciations are contractionary and a have a strong effect on

JEL Classification: E31; E52; E58.

Keywords: Inflation Targeting contractionary depreciations fear of floating