ABSTRACT
Among countries that have adopted inflation targets, Chile’s stabilisation experience is quite unique for three reasons. First, the Chilean economy appears to be one of the most indexed in the world: backward indexation mechanisms are widespread in many non-traded goods, labour, and financial markets. Even policy instruments are indexed, including income taxes and the monetary policy interest rate. 1 Second, and to a large extent in response to indexation, Chile’s programme of price stabilisation has been the world’s most gradualist. Inflation has been brought down step by step – almost monotonically – from 30% in 1990 to close to 3.0% in 1999. Third, Chile was among the first countries to adopt a monetary framework based on an explicit publicly announced annual inflation target. The first target was announced in September 1990 for the subsequent calendar year 1991. The (by then only recently independent) Central Bank of Chile (CBC) adopted the target at a time when annual inflation was around 25%, a figure that had been approximately stationary during the 1980s. Chile was among the very few countries (Israel being another case) to adopt inflation targeting when it had an inflation rate that exceeded its long-term inflation goal by 20 or more percentage points. This stands in stark contrast to most other (industrialised) countries that adopted targets when they were close to low, stationary inflation levels.
