A Critical View of Inflation Targeting: Crises, Limited Sustainability, and Aggregate Shocks
AbstractThis 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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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 127.
Date of creation: Nov 2001
Date of revision:
Other versions of this item:
- Michael Kumhof, 2002. "A Critical View of Inflation Targeting: Crises, Limited Sustaintability, and Aggregate Shocks," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 8, pages 349-394 Central Bank of Chile.
- Michael Kumhof, 2000. "A Critical View of Inflation Targeting: Crises, Limited Sustainability, and Aggregate Shocks," Working Papers 00022, Stanford University, Department of Economics.
- H4 - Public Economics - - Publicly Provided Goods
- K39 - Law and Economics - - Other Substantive Areas of Law - - - Other
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
- O34 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Intellectual Property Rights
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-10 (All new papers)
- NEP-CBA-2002-02-15 (Central Banking)
- NEP-IFN-2002-02-15 (International Finance)
- NEP-MON-2002-02-15 (Monetary Economics)
- NEP-PKE-2002-02-15 (Post Keynesian Economics)
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- 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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