It examines whether certain conditions have to be met before emerging economies can adopt an inflation-targeting regime and provides some empirical evidence on the matter. The issues analyzed 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, and
- the soundness of financial institutions and markets, and resilience to changes in exchange rates and interest rates.
While there are some conditions that should be met before inflation targeting is adopted in emerging economies, most of the other conditions and elements that have been proposed as essential to the inflation targeting framework can be introduced subsequent to the adoption of inflation targeting. The latter include construction of formal models for forecasting inflation, sophisticated empirical research on the transmission mechanism, issuing monetary policy reports or inflation reports, structural changes to reduce indexation, and strengthening the financial system by improving the regulation and supervision of financial institutions and encouraging the development of long-term domestic currency bond markets.
Even if the economic and institutional environment in emerging economies is not absolutely ideal at the outset, the benefits from adopting inflation targeting and then improving the environment would be substantial. And this was certainly the experience in the industrialized economies and in the emerging economies that have adopted inflation targeting.
The Paper also provides a background and brief summary of the book On Implementing Full-Fledged Inflation Targeting Regimes: Saying What You Do and Doing What You Say.
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