IMF: inflation targeting the next step for emerging economies

An IMF paper published in May examines the requirements emerging economies must meet before they can adopt an inflation-targeting regime and provides some empirical evidence on the matter.

The paper is the fifth chapter of a forthcoming monograph entitled "On Implementing Full-Fledged Inflation-Targeting Regimes: Saying What You Do and Doing What You Say.

While a number of emerging economies began to use inflation targeting in the first half of the 1990s, it was initially only one part of their policy framework, with some variant of exchange rate targeting typically being equally or more important.

The issues analysed are the priority of inflation targeting over other goals, the absence of fiscal dominance, central bank independence, the degree of control over the policy interest rate, a sound methodology for forecasting, the soundness of financial institutions and markets, and resilience to changes in exchange rates and interest rates.

The paper concludes that even if the economic and institutional environment in emerging economies is not absolutely ideal at the outset, the benefits from adopting inflation targeting and improving the environment would be substantial.

Click here to read paper