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What Can Low-Income Countries Expect From Adopting Inflation Targeting?

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  • Alexandra Peter
  • Sarwat Jahan
  • Edward R. Gemayel
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    Abstract

    Inflation targeting (IT) is a relatively new monetary policy framework for low-income countries (LICs). The limited number of LICs with an IT framework and the short time that has elapsed since the adoption of this framework explains why there are no previous empirical studies on the performance of IT in LICs. This paper has made a first attempt at filling this gap. It finds that inflation targeting appears to be associated with lower inflation and inflation volatility. At the same time, there is no robust evidence of an adverse impact on output. This may explain the appeal of IT for many LICs, where building credibility of monetary policy is difficult and minimizing output costs of reducing inflation is imperative for social and political reasons.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/276.

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    Length: 45
    Date of creation: 01 Nov 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/276

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    Keywords: Monetary policy; Developed countries; Emerging markets; Inflation targeting; Low-income developing countries; inflation; central bank; average inflation; high inflation; monetary fund; inflation rates; macroeconomic performance; inflation target; effect of inflation; monetary transmission; effects of inflation; inflation rate; price stability; monetary transmission mechanism; inflation targeting framework; lower inflation; inflation-targeting; inflation targeting regime; low inflation; monetary economics; monetary regimes; monetary targets; inflation performance; annual inflation; monetary policy framework; inflation objective; monetary aggregates; monetary authority; european monetary union; independent monetary policy; monetary union; national bank; monetary policy decisions; monetary aggregate; foreign exchange; inflation dynamics; monetary frameworks; monetary policy transmission mechanism; reduction in inflation; long-term interest rates; rates of inflation; inflation forecasts; price level; loose monetary policy; monetary anchor; control of inflation; high inflation rate; actual inflation; monetary policy instruments; monetary framework; inflation growth; monetary policies; rising inflation; monetary policy regime; fall in inflation; expansionary monetary policy; real interest rates; inflationary pressures; reserve requirements; monetary regime; acceleration in inflation; monetary authorities; monetary policy implementation; reduction of inflation; percent inflation; monetary programs;

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    References

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    1. Brito, Ricardo D. & Bystedt, Brianne, 2010. "Inflation targeting in emerging economies: Panel evidence," Journal of Development Economics, Elsevier, vol. 91(2), pages 198-210, March.
    2. Luke Byrne Willard, 2012. "Does inflation targeting matter? A reassessment," Applied Economics, Taylor & Francis Journals, vol. 44(17), pages 2231-2244, June.
    3. Vittorio Corbo & Óscar Landerretche & Klaus Schmidt-Hebbel, 2002. "Does Inflation Targeting Make a Difference?," 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 5, pages 221-270 Central Bank of Chile.
    4. 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.
    5. Douglas Laxton & Charles Freedman, 2009. "Inflation Targeting Pillars," IMF Working Papers 09/262, International Monetary Fund.
    6. Naqvi, Bushra & Rizvi, Syed Kumail Abbas, 2009. "Inflation Targeting Framework: Is the story different for Asian Economies?," MPRA Paper 19546, University Library of Munich, Germany.
    7. Marcel Peter & Scott Roger & Geoffrey Heenan, 2006. "Implementing Inflation Targeting," IMF Working Papers 06/278, International Monetary Fund.
    8. Marc Zelmer & Andrea Schaechter, 2000. "Adopting Inflation Targeting," IMF Occasional Papers 202, International Monetary Fund.
    9. Frederic S. Mishkin, 2004. "Can Inflation Targeting Work in Emerging Market Countries?," NBER Working Papers 10646, National Bureau of Economic Research, Inc.
    10. Goncalves, Carlos Eduardo S. & Salles, Joao M., 2008. "Inflation targeting in emerging economies: What do the data say?," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 312-318, February.
    11. Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
    12. Anna Nordstrom & Scott Roger & Mark R. Stone & Seiichi Shimizu & Turgut Kisinbay & Jorge Restrepo, 2009. "The Role of the Exchange Rate in Inflation," IMF Occasional Papers 267, International Monetary Fund.
    13. 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.
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    Cited by:
    1. Dabrowski , Marek, 2013. "Monetary policy regimes in CIS economies and their ability to provide price and financial stability," BOFIT Discussion Papers 8/2013, Bank of Finland, Institute for Economies in Transition.

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