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Argentina's Central Bank Wants to Adopt Inflation

Targetingby Santiago Mosquera

Inflation targeting, when implemented properly, appears to be delivering a solidmonetary framework for both industrialized and emerging market economies.It increases transparency and coherency of policy, at the same time that itprovides some discretion for dealing with short-run volatility. Although somecountries have been more successful thanothers in targeting inflation, everycountry that has adopted this framework is still using it, and every year morecentral bankers opt for it. hat has not been the case for !rgentina, where themonetary authorities have opted for a pseudo-fi"ed e"change-rate mechanism

and monetary targets, which fail to control inflation and introduce distortions inthe economy. But recent announcements reveal that some changes will takeplace over the medium term.

In h is latest presentation covering the monetary program for #$$%, Martin&edrado, president of the 'entral (ank of !rgentina, announced the institutionalob)ective to move towards an inflation-targeting framework. However, this willonly be implemented once the main macroeconomic var iables have levelled out ,following the worst economic crisis in the country*s history and the ensuingstabilization process. In addition, authorities wil l change the monetaryinstrument they target, focusing on the broader M# aggregate +money incirculation, plus private and public balances in deposit accounts during #$$% ,

rather thanthe monetary base +M$.

he announcement is welcome, as it signals that some of the requirements toadopt inflation targeting in the medium term are been addressed . In order tomove toward full-fledged inflation targeting, however, the central bank must begiven enough independence to set and pursue its own ob)ectives, a privilegethat appears to us unattainable under the irchner administration.

hanks to accounting maneuvers implemented during last year*s third quarter,monetary aggregates have grown according to the monetary program for the$th consecutive quarter, with M$ e"panding by $./0 and M# e"panding by

#.#0 in #$$/. !fter observing inflation*s performance , though, the merit of thisachievement is very questionable and confirms that, despite what its mainmission states, maintaining a low and stable domestic inflation is only asecondary ob)ective for the central bank. Apparently, its primary ob)ective,shared with !rgentina*s central government, is keeping the nominal e"change ata competitive level1a difficult endeavor in an environment of escalating inflowsof foreign e"change that increase the pressure for a nominal appreciation of thepeso.

argeting the M$ money base did provide enough information immediately afterthe economic crisis of #$$#, when the financial system was recovering and thelevel of credit demanded was relatively low. (ut as the !rgentine economy has

continued to e"pand, money demand has ballooned, along with the level ofcredit, making the transition to the use of M# a reasonable decision. heauthorities have set an .23#.#0 target range for monetary growth, wide

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8/13/2019 Texto N 11 Argentina Central bank

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enough to bring inflation down into the 430 range.

he central bank does not want to change its targets once the monetaryprogram has been announced , as it needed to do when inflation accelerated in

mid-#$$/. As such, the adoption of wide ranges for both domestic inflation andmoney-supply growth are a prudent tactic, particularly since #$$% will be the firstyear of targeting the broadermonetary variable. (y undertaking the ambitiousob)ective of inflation targeting over the medium term, though, this wide targetrange gives e"cessive discretion to the monetary authorities1precisely whencredibility-enhancing mechanisms should be put in place.

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