Under What Conditions Can Inflation Targeting Be Adopted? The Experience of Emerging Markets

Nicoletta Batini and Douglas Laxton

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: While there have been numerous studies of inflation targeting in industrial countries, there has been much less analysis of the effects of inflation targeting in emerging market countries. Based on a new and detailed survey of 31 central banks, this paper shows that inflation targeting in emerging-market countries brings significant benefits to the countries that adopt it relative to other strategies, such as money or exchange rate targeting. Indeed, by comparing the performance of the inflation-targeting countries with a sample of countries that pursue other regimes we show that there are significant improvements in anchoring both inflation and inflation expectations with no adverse effects on output. In addition, under inflation targeting interest rates, exchange rates, and international reserves are less volatile, and the risk of currency crises relative to money or exchange rate targets is smaller. Interestingly, IT seems to outperform exchange rate pegs—even when only successful pegs are chosen in comparison. The survey evidence indicates that it is unnecessary for countries to meet a stringent set of institutional, technical, and economic “preconditions” for the successful adoption of inflation targeting.

Date: 2006-12
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Chapter: Under What Conditions Can Inflation Targeting Be Adopted? The Experience of Emerging Markets (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:406

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