Inflation targeting and monetary analysis in Chile and Mexico

Abstract

This paper studies the role of monetary and open economy indicators in inflation targeting (IT) economies through the analysis of a nested Phillips curve/ P-star model for Chile and Mexico. For Chile a real money gap and a money growth indicator are found to be relevant in predicting deviations of observed from target inflation. In contrast, for Mexico real exchange rate measures are robust predictors of deviations of actual from (i) expected inflation during the pre-IT (1999) period, and (ii) target inflation in the post-IT span.inflation targeting, monetary policy, money demand, PPP, P-star, Phillips curve, cointegration, Kalman filter, block Granger non-causality, VARs