laceaeconomiappt2011june30cid.doc - revised Nov A Comparison of Product Price Targeting and Other Monetary Anchor Options for Commodity Exporters in

laceaeconomiappt2011june30cid.doc - revised Nov A...

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revised June 28, 2011+Nov. A Comparison of Product Price Targeting and Other Monetary Anchor Options, for Commodity Exporters in Latin America Jeffrey A. Frankel Harpel Professor, Harvard University Forthcoming, Economia , 2011 This paper was presented at a meeting of the 23 rd Economia panel of LACEA, May 7, 2011. It is a revised version of NBER Working Paper 16362, which in turn draws on an earlier study presented at a workshop on Myths and Realities of Commodity Dependence: Policy Challenges and Opportunities for Latin America and the Caribbean , World Bank, September 2009. The author thanks Cynthia Balloch and Daniella Llanos for excellent research assistance and participants at the LACEA meeting for comments. Abstract Seven possible nominal variables are considered as candidates to be the anchor or target for monetary policy. The context is countries in Latin America and the Caribbean (LAC), which tend to be price takers on world markets, to produce commodity exports subject to volatile terms of trade, and to experience procyclical international finance. Three anchor candidates are exchange rate pegs: to the dollar, euro and SDR. One candidate is orthodox Inflation Targeting. Three candidates represent proposals for a new sort of inflation targeting that differs from the usual focus on the CPI, in that prices of export commodities are given substantial weight and prices of imports are not: PEP (Peg the Export Price), PEPI (Peg an Export Price Index), and PPT (Product Price Targeting). The selling point of these production-based price indices is that each could serve as a nominal anchor while yet accommodating terms of trade shocks, in comparison to a CPI target. CPI-targeters such as Brazil, Chile, and Peru are observed to respond to increases in world prices of imported oil with monetary policy that is sufficiently tight to appreciate their currencies, an undesirable property, which is the opposite of accommodating the terms of trade. As hypothesized, a product price target generally does a better job of stabilizing the real domestic prices of tradable goods than does a CPI target. Bottom line: A Product Price Targeter would appreciate in response to an increase in world prices of its commodity exports, not in response to an increase in world prices of its imports. CPI targeting gets this backwards. JEL classifications: E5, F4. Key words: money, nominal anchor , peg, terms of trade, agricultural commodities, Inflation Targeting, Peg the Export Price, Product Price Targeting, CPI target, mineral commodities, gold, Latin America. 1
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A Comparison of Monetary Anchor Options, Including Product Price Targeting, for Commodity-Exporters in Latin America 1. Introduction: The Evolution of Nominal Targets for Monetary Policy in Latin America and the Caribbean In perhaps no other region have attitudes with respect to nominal anchors for monetary policy evolved more than in the developing countries of the Western Hemisphere.
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