Foreign exchange intervention in inflation targeters in Latin America

Foreign exchange intervention is widely used as a policy tool, particularly in emerging markets, but our understanding of many facets of this tool remain limited, especially in the context of flexible exchange rate regimes. The Latin American experience shows how some of its largest countries have adopted floating exchange rate regimes and inflation targeting while continuing to intervene in foreign exchange markets. This edited volume reviews detailed accounts from several central banks in Latin America and provides insight into how, and with what aim, many interventions were implemented. It pays special attention to the role of inflation-targeting monetary frameworks. Central banks in Latin America have managed the tensions between interventions and their inflation-targeting frameworks with a considerable degree of success. Clear communication policies and data transparency have been instrumental in maintaining the inflation objective while facilitating a relatively firm anchoring of inflation expectations. For economies that are not highly dollarized, rules-based intervention helped contain financial instability and build international reserves while preserving inflation targets. The Latin American experience can help other countries in the design and implementation of their policies.