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

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Author Info
Nicoletta Batini
Douglas Laxton

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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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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 406.

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Date of creation: Dec 2006
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Handle: RePEc:chb:bcchwp:406

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Laurence M. Ball & Niamh Sheridan, 2003. "Does Inflation Targeting Matter?," IMF Working Papers 03/129, International Monetary Fund. [Downloadable!]
  2. Nicoletta Batini & Paul Levine & Joseph Pearlman, 2004. "Indeterminacy with inflation-forecast-based rules in a two-bloc model," International Finance Discussion Papers 797, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  3. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank. [Downloadable!]
    Other versions:
  4. Batini, Nicoletta & Yates, Anthony, 2003. " Hybrid Inflation and Price-Level Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 283-300, June.
    Other versions:
  5. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-48, September. [Downloadable!] (restricted)
  6. Andrea Schaechter & Marc Zelmer, 2000. "Adopting Inflation Targeting: Practical Issues for Emerging Market Countries," IMF Occasional Papers 202, International Monetary Fund.
  7. Michael Kumhof, 2000. "A Critical View of Inflation Targeting: Crises, Limited Sustainability, and Aggregate Shocks," Working Papers 00022, Stanford University, Department of Economics. [Downloadable!]
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  8. Meyer, Laurence H., 2002. "Inflation targets and inflation targeting," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 147-162, August. [Downloadable!] (restricted)
  9. 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. [Downloadable!]
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  12. Nicoletta Batini, 2004. "Achieving and Maintaining Price Stability in Nigeria," IMF Working Papers 04/97, International Monetary Fund. [Downloadable!]
  13. Norman Loayza & Raimundo Soto, 2001. "Ten Years of Inflation Targeting: Design, Performance, Challenges," Working Papers Central Bank of Chile 131, Central Bank of Chile. [Downloadable!]
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  16. Amato, Jeffery D. & Gerlach, Stefan, 2002. "Inflation targeting in emerging market and transition economies: Lessons after a decade," European Economic Review, Elsevier, vol. 46(4-5), pages 781-790, May. [Downloadable!] (restricted)
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  17. 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 101, Central Bank of Chile. [Downloadable!]
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  18. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
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  19. Sandra Pianalto, 2005. "The power of price stability," Economic Commentary, Federal Reserve Bank of Cleveland, issue May 1. [Downloadable!]
  20. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-80. [Downloadable!]
  21. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Addicted to Dollars," NBER Working Papers 10015, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  25. Alina Carare & Andrea Schaechter & Mark R. Stone & Marc Zelmer, 2002. "Establishing Initial Conditions in Support of Inflation Targeting," IMF Working Papers 02/102, International Monetary Fund. [Downloadable!]
  26. Markus Hyvonen, 2004. "Inflation Convergence Across Countries," RBA Research Discussion Papers rdp2004-04, Reserve Bank of Australia. [Downloadable!]
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  29. repec:rus:hseeco:123906 is not listed on IDEAS
  30. Laurence Ball & Niamh Sheridan, 2003. "Does Inflation Targeting Matter?," NBER Working Papers 9577, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Leonardo Leiderman & Rodolfo Maino & Eric Parrado, 2006. "Inflation Targeting in Dollarized Economies," Working Papers Central Bank of Chile 368, Central Bank of Chile. [Downloadable!]
    Other versions:
  2. Klaus Schmidt-Hebbel, 2006. "La Gran Transición de Regímenes Cambiarios y Monetarios en América Latina," Economic Policy Papers Central Bank of Chile 17, Central Bank of Chile. [Downloadable!]
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