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A Critical View of Inflation Targeting: Crises, Limited Sustainability, and Aggregate Shocks

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  • Michael Kumhof

Abstract

This paper presents a critical appraisal of inflation targeting as a monetary policy regime for emerging markets. It is shown that this policy, if understood as a strict commitment to a CPI inflation target, shares many features with exchange rate targeting and is quite different from flexible exchange rates under money growth rules. Inflation targets are vulnerable to speculative attacks, although less so than exchange rate targets. They perform worse than exchange rate targets when policy sustainability is limited. And their relative performance under exogenous shocks, not surprisingly, depends on the nature and direction of those shocks. Given this lack of an obvious advantage over exchange rate targets, the real attraction of inflation targets may be that they give the policymaker discretion. This, in the context of many emerging markets, has to be a cause for concern.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 127.

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Date of creation: Nov 2001
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Handle: RePEc:chb:bcchwp:127

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Cited by:
  1. Roland Craigwell & Kevin Greenidge & Harold Codrington & DeLisle Worrell, 2003. "Economic Resilience with An Exchange Rate Peg," IMF Working Papers 03/168, International Monetary Fund.
  2. Reginaldo P. Nogueira Jnr, 2006. "Inflation Targeting and the Role of Exchange Rate Pass-through," Studies in Economics 0602, Department of Economics, University of Kent.
  3. Seedwell Hove & Albert Touna Mama & Fulbert Tchana Tchana, 2012. "Terms of Trade Shocks and Inflation Targeting in Emerging Market Economies," Working Papers 273, Economic Research Southern Africa.

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