Anchoring Inflation Expectations: Evidence from Latin America during the Post-COVID Stress Test

This paper examines the anchoring of long-run inflation expectations in Latin America during the post-COVID inflation surge. Monetary frameworks—many established around the turn of the century—generally performed well, with long-run beliefs moving little despite large shocks. Over the last 20 years, both tails of the expectations distribution have converged toward targets, though an upside skew persists. Cross-sectional patterns are consistent with personally credible policymakers operating within frameworks subject to institutional constraints. Using new data on anchoring, we show that stronger anchoring mitigates the inflationary impact of external shocks, while the effects on monetary transmission are mixed but consistent with theory. We also document that credibility evolves asymmetrically: hawkish monetary policy surprises deliver modest improvements, whereas dovish shocks erode anchoring more rapidly. Narrative case studies illustrate how steps toward inflation targeting can succeed in anchoring expectations even in crises, provided institutional and political support remains strong.