Indexing, exchange rate policy and effects of inflationary feedback in Latin America

ABSTRACT

This paper examines inflationary adjustment processes in Argentina, Brazil, Chile, Ecuador, Peru, and Uruguay with time-varying estimation techniques to determine the relationship between inflationary inertia or feedback effects from past to current inflation and the degree of indexation of wages and exchange rates to past inflation rates. The results show that reductions in the degree of exchange rate linkage to past inflation have not been particularly helpful in larger or relatively more diversified economies (such as Argentina, Brazil, or Chile), while reductions in wage linkages to past inflation rates have had strong but short-lived effects.

KEYWORDS:
Exchange rate; inflation; stabilization; wage policy