Inflation Targeting in the World Economy

Author:Scott Roger/Mark Stone
Position:Senior Economist/Deputy Division Chief IMF Monetary and Financial Systems Department

The Other IT: Getting the Big Picture.


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The Other IT: Getting the Big Picture

Starting in the early 1990s, many countries-initially industrial and, later, emerging market countries-began to adopt inflation targeting (IT) as a way of achieving price stability. IT countries make an explicit commitment to meet an inflation target (or target range): they regularly announce their targets to the public, and they have institutional arrangements to ensure that the central bank is accountable for meeting the target. About twenty countries have adopted an IT regime, and the trend appears likely to continue.

Ted Truman, a former senior official at the U.S. Federal Reserve Board and the U.S. Treasury, applies his considerable experience to a big-picture assessment of the inflation targeting regime. He describes himself as "an inflation targeting sympathizer, not a proselytizer," and he believes that IT should be employed flexibly. The book is well thought out, and we agree with most, but not all, of its assessments and recommendations.

Truman urges the IMF to take a "more benign and constructive attitude" toward IT, based on his perception that the IMF has discouraged its adoption in emerging market countries. While it may be true that the IMF was slow to warm to IT, it has become much more supportive, including by providing extensive technical assistance to countries that want to consider adopting such a regime. Still, the IMF's advice has to be tailored to each country's circumstances. A message that is largely missing in this book is that, although IT is flexible, it may not work well for countries that do not have the credibility to stick to a target or are extremely open and vulnerable to large exchange rate fluctuations.

Truman recommends that IMF conditionality-specifically, the conditions attached to the performance of monetary policy-be tailored to IT frameworks. This, in fact, is already the case. The so-called performance criterion in IMF programs for countries with an IT regime is based on deviations from the inflation target; thus, it dovetails with the country's chosen monetary framework. At the same time, the condition that international reserves must not fall below an agreed level is maintained with a view to safeguarding IMF resources.

The book argues for the United States, Japan, and the euro area (the so-called G3) to adopt IT. However, Truman seems to overstate his case. Inflation in the United States and the euro...

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