Inflation Targeting: Assessing the Evidence

Abstract

The aim of this chapter is to deal with the empirical aspects of the 'new' monetary policy framework, known as Inflation Targeting. We review the evidence for both developed and emerging economies. The emphasis, though, is on emerging economies, which can be thought of as preparing the ground for the chapter to follow that concentrates on the experience with inflation targeting in Brazil. The results gathered in this study demonstrate that although Inflation Targeting has gone hand-in hand with low inflation, it is very far from declaring the strategy a resounding success. The evidence produced in this chapter suggests that non-Inflation-Targeting central banks have also been successful on this score. At a general level this chapter should be read as providing the necessary prolegomena for the chapter that follows, which concentrates crucially on the Brazilian experience. JEL Classification: E31, E52 IntroductionInflation Targeting (IT) as a policy framework, designed to tame inflation, has been with us since the early 1990s. Recent work makes the point that a significant number of countries adopted this strategy, and the number is growing. For example, Sterne (2002, Appendix A) suggests that 54 countries pursued one form or another of IT by 1998, compared with only 6 in 1990. A more recent study (IMF, 2005) suggests that 21 countries (8 developed and 13 emerging) are now clear inflation targeters, pursuing a full-fledged IT strategy (FFIT in short). Indeed, a number of other countries are seriously considering the adoption of this strategy. Many studies have attempted to examine empirically the degree and extent of the impact of IT on inflation in various countries. We review this literature in what follows and conclude that the available empirical evidence produces mixed results, although the case with developing countries is less clear-cut.

Inflation targeting at the crossroads: Evidence from post-communist economies during the crisis

“…The studies evaluating macroeconomic performance under this monetary regime (see, for instance, Siklos, 1999;Mishkin and Schmidt-Hebbel, 2001; Kuttner and Posen, 2001;Corbo et al 2002;Neumann and von Hagen, 2002; see also Angeriz and Arestis, 2007, for a summary) generally conclude that after IT was introduced inflation and its persistence fell. The results on output volatility remained mixed, thus not giving support for the claim that IT is a superior strategy.…”

Characterising the Inflation Targeting Regime in South Korea

“…3 This consistent with BOK's objective of maintaining …nancial stability insofar as a substantial depreciation of the won would cause adverse balance sheet e¤ects.…”