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| This paper investigates the forward-lookingness of monetary policy related to stabilising inflation over time under different degrees of central bank credibility in the four largest Latin American economies which experienced a different transition path to the full-fledged inflation targeting regime. The analysis is based on an interest rate-based hybrid monetary policy rule with time-varying coefficients which captures possible shifts from a backward-looking to a forward-looking monetary policy rule related to inflation stabilisation. The main results show that monetary policy is fully forward-looking and exclusively reacts to expected inflation under nearly perfect central bank credibility. Under a partially credible central bank monetary policy is both backward-looking and forward-looking in terms of stabilising inflation. Moreover monetary authorities put increasingly more priority on stabilising expected inflation relative to actual inflation if central bank credibility tends to improve over time. |
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