International Monetary Options for the Twenty-First Century

The crises of the 1990s convinced many observers that intermediate exchange rate arrangements are fragile and crisis prone. But calling for emerging markets to abandon the exchange rate as an anchor for policy compels those issuing the call to offer an alternative. In this article, the author assesses whether inflation targeting is a viable alternative for emerging markets. He focuses on distinctive characteristics of the policy environment that bear on its feasibility : these include the speed of pass-through, the difficulty of forecasting inflation, imperfect credibility, and liability dollarization. The author concludes that none of these complications renders inflation targeting infeasible, although a number render it more complex.