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Inflation Targeting: What Have We Learned?

Carl Walsh

International Finance, 2009, vol. 12, issue 2, 195-233

Abstract: Inflation targeting has been widely adopted in both developed and emerging economies. In this essay, I survey the evidence on the effects of inflation targeting on macroeconomic performance and assess what lessons this evidence provides for inflation targeting and the design of monetary policy. While macroeconomic experiences among both inflation targeting and non‐targeting developed economies have been similar, inflation targeting has improved macroeconomic performance among developing economies. Importantly, inflation targeting has not been associated with greater real economic instability among either developed or developing economics. While cost shocks, such as the large rise in commodity prices that occurred in 2007 and early 2008, force central banks to make difficult short‐run trade‐offs, the ability to deal with demand shocks and financial crises can be enhanced by a commitment to an explicit target.

Date: 2009
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Handle: RePEc:bla:intfin:v:12:y:2009:i:2:p:195-233