Why did the inflation targeting regime with a floating exchange rate (IT) announced in september 2016 by Argentina’s Central Bank (BCRA) fail to definitively stabilize prices?

Abstract

This paper assesses the underpinning causes behind the fall of Argentina’s recent IT regime. A literature review of inflation targets along with analyses of market data delineate that weak monetary institutions, aggressive relative price adjustments and fiscal dominance played a substantial role in undermining the BCRA’s pursuit of price stability. In the monetary domain, a high initial inflationary context coupled with the lack of a de jure strengthening of central bank independence compromised the program. Likewise, aggressive corrections of regulated prices and the adjustments of an overly appreciated domestic currency reverberated in Argentina’s inflation. Finally, the Treasury’s procrastination in closing the budget deficit resulted in a high sterilization cost for the BCRA as well as in the modification of preestablished targets, weakening the regime’s credibility.