On Target? the International Experience with Achieving Inflation Targets

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper examines the international experience with full-fledged inflation targeting monetary regimes. Stylized facts are brought together from a review of the institutional elements of inflation targeting frameworks, a comparison of actual and targeted inflation outcomes, and case studies of large inflation target misses. Inflation targets are missed about 40 percent of the time and often by substantial amounts and for prolonged periods, yet no country has dropped inflation targeting. The resilience of the inflation targeting regime is attributable to the flexibility of the framework, its high standards of transparency and accountability, and the lack of realistic alternatives.

Testing the Transparency Benefits of Inflation Targeting: Evidence From Private Sector Forecasts

“…Their analysis of nine major central banks concludes that "the most transparent central banks ... are all in ‡ation targeters." Roger and Stone (2005), who measure transparency according to central banks' adherence to the IMF's Code of Monetary and Financial Policy Transparency, come to the same conclusion. The validity of these results relies on the suitability of the subjective transparency measure employed: as with any subjective index, there is a risk of tautological reasoning biasing the results toward …nding an e¤ect.…”

“…I date the adoption of IT to a speci…c month and year from Roger and Stone (2005), which seems, for most countries, to represent a broad consensus view.…”

“…The communication strategy accompanying the targeting regime typically includes enhanced policy analysis, more openness about internal policy deliberations and greater explanation of policy decisions, resulting in enhanced procedural, policy, and operational transparency (Berg, 2005). Finally, this communication strategy usually involves a more explicit and public discussion of the forecasts underlying policy decisions, including attendant risks and underlying assumptions, which tends to increase economic transparency (Roger and Stone, 2005).…”

From Bretton Woods to Inflation Targeting: Financial Change and Monetary Policy Evolution in Europe

“…In addition, no country that has adopted IT has so far abandoned it (except to enter EMU); and there is some tentative evidence that inflation targeters coped better with the commodity price rises and financial crisis of The current majority view also favours the adoption of IT by emerging economies. Roger and Stone (2005), for example, view the performance of emerging inflation targeters as generally successful, though they note that emerging countries typically take longer than industrial countries to get their inflation down to the ultimate target level, that their inflation under stable inflation targets is more volatile than that of industrial countries and that large target misses have typically been associated with exchange rate shocks. 29 However, it is recognised that many emerging country inflation targeters still pay significant attention to (and manage) their exchange rates, and for good reasons: typically their exchange rates are liable to high volatility, and they have high exchange rate-prices pass-throughs.…”

Inflation Targeting, Employment Creation and Economic Development: Assessing the Impacts and Policy Alternatives

“…In a number of countries, inflation has come down, to be sure, but it is questionable to what extent the drop in inflation is due to changes in domestic monetary policy, rather than the overall global fall in inflation. (Ball and Sheridan, 2003;Roger and Stone, 2005). Moreover, even if domestic monetary policy has reduced inflation, the hoped for gains in employment have, generally, not materialized; and, for many countries following this orthodox approach, economic growth has not significantly increased.…”