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Under What Conditions Can Inflation Targeting Be Adopted? The Experience of Emerging Markets

In: Monetary Policy under Inflation Targeting

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  • Nicoletta Batini

    (International Monetary Fund)

  • Douglas Laxton

    (International Monetary Fund)

Abstract

While there have been numerous studies of inflation targeting in industrial countries, there has been much less analysis of the effects of inflation targeting in emerging market countries. Based on a new and detailed survey of 31 central banks, this paper shows that inflation targeting in emerging-market countries brings significant benefits to the countries that adopt it relative to other strategies, such as money or exchange rate targeting. Indeed, by comparing the performance of the inflation-targeting countries with a sample of countries that pursue other regimes we show that there are significant improvements in anchoring both inflation and inflation expectations with no adverse effects on output. In addition, under inflation targeting interest rates, exchange rates, and international reserves are less volatile, and the risk of currency crises relative to money or exchange rate targets is smaller. Interestingly, IT seems to outperform exchange rate pegs—even when only successful pegs are chosen in comparison. The survey evidence indicates that it is unnecessary for countries to meet a stringent set of institutional, technical, and economic “preconditions” for the successful adoption of inflation targeting.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

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This chapter was published in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Monetary Policy under Inflation Targeting, , chapter 12, pages 467-506, 2007.

This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v11c12pp467-506.

Handle: RePEc:chb:bcchsb:v11c12pp467-506

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