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

In: Inflation Targeting: Desing, Performance, Challenges

  • Michael Kumhof

    (International Monetary Fund)

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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This chapter was published in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Inflation Targeting: Desing, Performance, Challenges, , chapter 8, pages 349-394, 2002.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v05c08pp349-394.
Handle: RePEc:chb:bcchsb:v05c08pp349-394
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  16. Carmen M. Reinhart, 2000. "Mirage of Floating Exchange Rates," American Economic Review, American Economic Association, vol. 90(2), pages 65-70, May.
  17. Michael Kumhof & Shujing Li & Isabel Yan, . "Balance of Payments Crises Under Inflation Targeting," Working Papers 00020, Stanford University, Department of Economics.
  18. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
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