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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.

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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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References

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  1. Baltensperger, Ernst & Fischer, Andreas M & Jordan, Thomas J., 2006. "Strong Goal Independence and Inflation Targets," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5915, C.E.P.R. Discussion Papers.
  2. Lars E O Svensson, 1997. "Inflation targeting in an open economy: strict or flexible inflation targeting?," Reserve Bank of New Zealand Discussion Paper Series G97/8, Reserve Bank of New Zealand.
  3. Mishkin, F.S., 1998. "International Experiences with Different Monetary Policy Regimes," Papers, Stockholm - International Economic Studies 648, Stockholm - International Economic Studies.
  4. Nicoletta Batini & Paul Levine & Joseph Pearlman, 2004. "Indeterminacy with Inflation-Forecast-Based Rules in a Two-Bloc Model," School of Economics Discussion Papers, School of Economics, University of Surrey 0204, School of Economics, University of Surrey.
  5. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2014. "Addicted to Dollars," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 1-50, May.
  6. Anne-Marie Brook & Özer Karagedikli & Dean Scrimgeour, 2002. "An optimal inflation target for New Zealand: lessons from the literature," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 65, September.
  7. Scott Roger & Mark R. Stone, 2005. "On Target? the International Experience with Achieving Inflation Targets," IMF Working Papers 05/163, International Monetary Fund.
  8. Nicoletta Batini & Anthony Yates, 2001. "Hybrid inflation and price level targeting," Bank of England working papers 135, Bank of England.
  9. Rich, Georg, 2000. "Monetary Policy without Central Bank Money: A Swiss Perspective," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 3(3), pages 439-69, November.
  10. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile, Central Bank of Chile 101, Central Bank of Chile.
  11. Marc Zelmer & Andrea Schaechter & Mark R. Stone & Alina Carare, 2002. "Establishing Initial Conditions in Support of Inflation Targeting," IMF Working Papers 02/102, International Monetary Fund.
  12. Meyer, Laurence H., 2002. "Inflation targets and inflation targeting," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 13(2), pages 147-162, August.
  13. Jaime Ruiz-Tagle, 2006. "Financial Markets Incompleteness and Inequality Over the Life-Cycle," Working Papers Central Bank of Chile, Central Bank of Chile 405, Central Bank of Chile.
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Citations

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Cited by:
  1. Ondra Kamenik & Heesun Kiem & Vladimir Klyuev & Douglas Laxton, 2013. "Why Is Canada's Price Level So Predictable?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 45(1), pages 71-85, 02.
  2. Seedwell Hove & Albert Touna Mama & Fulbert Tchana Tchana, 2011. "Do Monetary, Fiscal and Financial Institutions Really Matter for Inflation Targeting in Emerging Market Economies?," Working Papers 247, Economic Research Southern Africa.
  3. International Monetary Fund, 2009. "Inflation Targeting Under Imperfect Policy Credibility," IMF Working Papers 09/94, International Monetary Fund.
  4. Charles Freedman & Douglas Laxton, 2009. "Why Inflation Targeting?," IMF Working Papers 09/86, International Monetary Fund.
  5. Jean Louis, Rosmy & Balli, Faruk, 2013. "Low-inflation-targeting monetary policy and differential unemployment rate: Is monetary policy to be blamed for the financial crisis? — Evidence from major OECD countries," Economic Modelling, Elsevier, Elsevier, vol. 30(C), pages 546-564.
  6. Lucotte, Yannick, 2010. "Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation," MPRA Paper 23871, University Library of Munich, Germany.
  7. De Pooter, Michiel & Robitaille, Patrice & Walker, Ian & Zdinak, Michael, 2014. "Are Long-Term Inflation Expectations Well Anchored in Brazil, Chile and Mexico?," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1098, Board of Governors of the Federal Reserve System (U.S.).
  8. Novák, Zsuzsanna, 2014. "Monetáris politika, infláció és gazdasági növekedés Kelet-Közép- és Délkelet-Európában
    [Monetary policy, inflation and economic growth in Central and South Eastern Europe]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 923-942.
  9. Calani, Mauricio, 2007. "Testing Globalization-Disinflation Hypothesis," MPRA Paper 4787, University Library of Munich, Germany, revised 10 Sep 2007.
  10. repec:nbr:nberwo:12876 is not listed on IDEAS
  11. Bystedt, Brianne & Brito, Ricardo D., 2008. "Inflation targeting in emerging economies: Panel evidence," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_125, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  12. Minea, Alexandru & Tapsoba, René, 2014. "Does inflation targeting improve fiscal discipline?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 40(C), pages 185-203.
  13. Lucotte, Yannick, 2010. "The choice of adopting inflation targeting in emerging economies: Do domestic institutions matter?," MPRA Paper 27118, University Library of Munich, Germany.
  14. Hanna Samaryna & Jakob de Haan, 2011. "Right on Target: Exploring the Determinants of Inflation Targeting Adoption," DNB Working Papers, Netherlands Central Bank, Research Department 321, Netherlands Central Bank, Research Department.
  15. Brito, Ricardo D., 2009. "Does inflation targeting really matter? Another look at the OECD economies," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_193, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  16. Carlos A. Carrasco & Jesús Ferreiro, 2011. "Inflation Targeting and Economic Performance: The Case of Mexico," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(5), pages 675-692, December.
  17. Lucotte, Yannick, 2012. "Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation," Economic Systems, Elsevier, Elsevier, vol. 36(4), pages 609-628.
  18. Varella Mollick, Andre & Torres, Rene Cabral & Carneiro, Francisco G., 2008. "Does Inflation Targeting Matter for Output Growth? Evidence from Industrial and Emerging Economies," Policy Research Working Paper Series 4791, The World Bank.
  19. Metin Ozdemir & Selim Tuzunturk, 2009. "Is price stability enough? Macroeconomic performance of inflation targeting in developing countries," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, Inderscience Enterprises Ltd, vol. 1(4), pages 352-372.
  20. Scott Roger, 2009. "Inflation Targeting At 20," IMF Working Papers 09/236, International Monetary Fund.

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