We examine how monetary policy has been conducted in four early adopters of Inflation Targeting: Brazil, Chile, Colombia and Peru. First, a Markov-Switching approach shows that while all countries exhibit considerable stability in their responses to the inflation and output gaps, most have departed from this rule in times of extreme turmoil. We also find some evidence that the policy rate responds, albeit with only minor economic significance, to the real exchange rate in Colombia and to the private credit gap in Chile, the latter probably suggesting financial stability concerns. We find no evidence of changes in credibility over time. Second, intervention in the forex market is driven primarily by exchange rate misalignments rather than by exchange rate volatility or by an international reserves objective. Such intervention is generally larger when the currency is “strong” than when it is “weak”. Thus, there is some evidence that inflation targeting coexists with a degree of fear of floating and a financial stability objective, either built directly into the policy rule or complemented with macro-prudential measures such as reserve accumulation.
