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The Brazilian central bank is facing a huge challenge with its decision to make inflation-targeting the cornerstone of monetary policy. With the failure of the previous policy aimed at preserving the exchange rate - which was in place between March 1995 until the real's devaluation in January - it is arguable that the bank under new governor Armínio Fraga had little choice but to go down this road.
The only other serious alternative - targeting monetary aggregates - would be difficult to implement in Brazil because of the high instability of money demand. Yet inflation targeting will hardly be any easier to bring off with the central bank facing a paucity of data on transmission mechanisms. This is needed to help decide what amount of money will feed through...
