Inflation targeting and credibility Adoption of IT has also contributed to the buildup of credibility of monetary policy in IT countries. Several authors show that the IT regime has helped in anchoring inflation expectations at levels close to inflation targets and inflation expectations are more stable than in the U.S. (Ramos et al., 2007; Gürkaynak et al., 2007). In Chile, the distance of inflation expectations from inflation targets was closed as targets converged toward the stationary 3% level and the Central Bank showed strong commitment to attaining targets (Céspedes and Soto, 2005). During the past five years, inflation expectations have remained close to the mid-point of the inflation target range, reflecting high credibility of the IT regime (figure 9). Inflation targets and stability Emerging economies have experienced reductions in the volatility of both inflation and output (figure 10). However, volatility reductions have been more pronounced in IT countries than in non-IT countries. Volatilities of growth and inflation have fallen very significantly in Chile, even in comparison to other IT countries. Two factors explain most of the volatility reduction in IT countries: smaller shocks hitting the economy and improvements in monetary policy efficiency (Mishkin and Schmidt-Hebbel, 2007). Figure 11 depicts the estimated average efficiency frontier of MP for emerging economies before their adoption of IT (orange schedule) and the observed pair of output and inflation volatilities (red point).
Figure 2 CPI inflation around the world (1)  Commodity prices (5)  (annual change, percent)  12  12  10  10  8  8  6  6  4  4  2  2  0  0  -2  -2  -4  -4 05  06  07  08  09  10  11  U.S.  Eurozone  Latin America (2)  Emerging Asia (3)  (monthly index, Jan.00-Sep.11=100)  250 200 150 100 50 0 00  02  Emerging Europe (4)  04  06  08  10  FAO foodstuffs WTI oil  (1) Regions weighted at PPP. Data through August 2011. (2) CPI includes Argentina, Brazil, Chile, Colombia, Mexico and Peru. (3) CPI includes China, India, Indonesia, Malaysia, South Korea, Thailand and Taiwan. (4) CPI includes the Czech Republic, Hungary, Poland, Russia and Turkey. (5) Data through September 2011. Sources: Bloomberg, CEIC Data, IMF and statistics bureaus of respective countries. BIS central bankers’ speeches  7  Figure 3 Inflation indicators (annual change, percent) 10  10  8  8  6  6  4  4  2  2  0  0  -2  -2  -4  -4 06  07  08  CPI  09  10  11  CPI excluding food and energy  Sources: Central Bank of Chile and National Statistics Institute (INE).