Inflation Targeting and Inflation Risk in Latin America

Abstract

We analyzed the effects of inflation targeting (IT) implementation and functioning through the reaction function of monetary authorities from Latin American (LA) inflation targeters (ITers), e.g. Brazil, Chile, Colombia, Mexico, and Peru. We adapted the Value-at-Risk (VaR) and CoVaR to the Inflation-at-Risk (IaR) and Co-Inflation-at-Risk (CoIaR), respectively, to estimate the inflation at the extremes of its probability density functions. The results suggested that the IT was able to reduce inflation risk for all ITers. Chile and Peru are further ahead in terms of inflationary control, whereas in Brazil, it is more difficult. We propose the IaR and CoIaR as additional risk-management tools.

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