Anne Krueger, First Deputy Managing Director of the International Monetary Fund will follow me in this initial session, presenting the invited lecture of this conference, which will deal with IMF policies relating to the scope of price stability in member countries. The second session is centered around theoretical works, with important implications of monetary policy, on optimal inflation targeting schemes. Lars Svensson will analyze an optimal inflation targeting (or inflation forecasting) system, examining the convenience of using and publishing the path of future monetary policy rates consistent with the projection model used by the central bank. Pierpaolo Benigno and Michael Woodford study the optimality of inflation targeting under various fiscal regimes, including cases of incompliance with the intertemporal budget constraint and when taxes have distorting effects. Session III focuses on reviewing the inflation targeting regime in emerging economies. Nicoletta Batini and Douglas Laxton evaluate compliance with initial conditions and the macroeconomic consequences of adopting inflation targeting in developing countries, on the basis of a recent survey taken by themselves to 31 emerging economies’ central banks. Luis Céspedes and Claudio Soto present new evidence that inflation dynamics in Chile has changed in the recent past, which they ascribe to the credibility gained by monetary policy. Rodrigo Caputo, Felipe Liendo and Juan Pablo Medina analyze interaction between the monetary policy and the structure of the Chilean economy during the inflation targeting period, estimating and calibrating a new dynamic stochastic general equilibrium model. The following session presents new evidence on the world’s experience with inflation targeting.

Eighty years of the Central Bank of Chile and how inflation was conquered in Chile The Central Bank of Chile was created in 1925 as an entity apart from the Executive Power. That year, also two laws related with the Bank’s startup were enacted: the Monetary Law and the General Banking Act. The former established a gold standard, while the latter created the Superintendency of Banks to supervise commercial banks. The Central Bank was granted the monopoly for printing bills, which under said Monetary Law would be gold convertible. But the foreign exchange regime and the Bank’s institutionality as set forth in 1925 weren’t strong enough to cope with the Great Depression with some success (it had enormous impact on the Chilean economy) and the growing demands for fiscal funding. These forced the abandonment of the gold standard, the imposition of foreign exchange controls, the creation of multiple exchange rates and the beginning of trade. Since the Great Depression – except for very short spans of relative macroeconomic stability –, the country suffered decades of high, volatile inflation. The ultimate cause of this was the systematic expansion of credit on the part of the Central Bank, both to state-owned organizations and to the private sector. Inflation followed inevitably and caused the failure of stabilization attempts in the years 1950 and 1960. The deterioration of the fiscal and monetary situation culminated in the early 1970s in a short hyperinflation.