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Assessing the Performance of Inflation Targeting in East Asian economies

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Author Info

  • Hiroyuki Taguchi

    (Policy Research Institute)

  • Chizuru Kato

Abstract

This paper aims at assessing the performance of the inflation targeting framework from the quantitative perspective of the money and inflation relationship, focusing on the four East Asian economies, i.e. Korea, Indonesia, Thailand and the Philippines, who adopted the inflation targeting framework soon after the 1997-98 Asian currency crisis. Our estimation results told us that the inflation targeting framework in the sample economies, except for the Philippines, has functioned well as an anchor to curb inflation, in the sense that the framework speeds up price adjustment against money supply compared with their previous regime of pegged exchange rates. We interpret the speeding-up of price adjustment under inflation targeting framework in such a way that the framework may have been able to curb inflation through stabilizing inflationary expectations. We also found that the well-functioning inflation targeting framework was consistent with another estimation outcome : that of enhanced monetary autonomy under the post-crisis floating exchange rate regime.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 23078.

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Date of creation: Jan 2010
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Handle: RePEc:eab:macroe:23078

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Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
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Related research

Keywords: inflation targeting framework; East Asian emerging market economy; money-inflation relationship; co-integration test; error correction estimation;

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References

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  1. Arminio Fraga & Ilan Goldfajn & Andre Minella, 2003. "Inflation Targeting in Emerging Market Economies," NBER Working Papers 10019, National Bureau of Economic Research, Inc.
  2. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
  3. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  4. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
  5. Jaroslava Hlouskova & Martin Wagner, 2006. "The Performance of Panel Unit Root and Stationarity Tests: Results from a Large Scale Simulation Study," Econometric Reviews, Taylor & Francis Journals, vol. 25(1), pages 85-116.
  6. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," NBER Working Papers 12876, National Bureau of Economic Research, Inc.
  7. Frederic S. Mishkin & Miguel A. Savastano, 2000. "Monetary Policy Strategies for Latin America," NBER Working Papers 7617, National Bureau of Economic Research, Inc.
  8. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
  9. Hiroyuki Taguchi, 2009. "Currency Regime and Monetary Autonomy," Finance Working Papers 23076, East Asian Bureau of Economic Research.
  10. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  11. Frederic S. Mishkin, 2004. "Can Inflation Targeting Work in Emerging Market Countries?," NBER Working Papers 10646, National Bureau of Economic Research, Inc.
  12. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  13. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  14. Barry Eichengreen, 2002. "Can Emerging Markets Float? Should They Inflation Target?," Working Papers Series 36, Central Bank of Brazil, Research Department.
  15. Reza Siregar & Siwei Goo, 2008. "Inflation Targeting Policy: The Experiences Of Indonesia And Thailand," CAMA Working Papers 2008-23, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  16. Martin Cerisola & Gaston Gelos, 2005. "What Drives Inflation Expectations in Brazil? An Empirical Analysis," IMF Working Papers 05/109, International Monetary Fund.
  17. Lin, Shu & Ye, Haichun, 2009. "Does inflation targeting make a difference in developing countries?," Journal of Development Economics, Elsevier, vol. 89(1), pages 118-123, May.
  18. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  19. Marc Zelmer & Andrea Schaechter, 2000. "Adopting Inflation Targeting," IMF Occasional Papers 202, International Monetary Fund.
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Cited by:
  1. William Miles & Sam Schreyer, 2012. "Is monetary policy non-linear in Indonesia, Korea, Malaysia, and Thailand? A quantile regression analysis," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 26(2), pages 155-166, November.
  2. Roseline Nyakerario Misati & Esman Morekwa Nyamongo & Lucas Kamau Njoroge & Sheila Kaminchia, 2012. "Feasibility of inflation targeting in an emerging market: evidence from Kenya," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(2), pages 146-159, June.

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