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

Michael Kumhof

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: 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.

Date: 2001-11
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-pke
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Citations: View citations in EconPapers (8)

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Related works:
Chapter: A Critical View of Inflation Targeting: Crises, Limited Sustaintability, and Aggregate Shocks (2002)
Working Paper: A Critical View of Inflation Targeting: Crises, Limited Sustainability, and Aggregate Shocks (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:127

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