Making the transition to inflation targeting
| Pages | 233-236 |
Page 233
Inflation targeting has become a popular framework for the conduct of monetary policy. The challenges that industrial countries face in adopting such a framework are well understood. But what do emerging market countries need to be thinking about as they look to adopt inflation targeting? In the just-released Working Paper, Establishing Initial Conditions in Support of Inflation Targeting, Alina Carare, Andrea Schaechter, Mark Stone, and Mark Zelmer examine the issues for emerging market countries and offer practical advice on how to create the initial conditions needed to support an inflation targeting framework.
Under an inflation targeting framework, the inflation target prevails over any other policy objective, with the inflation forecast serving as the intermediate guide. But how do countries adopt such a framework? How do they make the transition from other monetary policy regimes? For emerging market countries, the steps taken in this transition process offer their own rewards. The steps, the authors say, are useful not only for countries willing and able to adopt inflation targeting but also for those that have decided to float their exchange rates (at least within fairly large bands) and are not able to adopt full-fledged inflation targeting. For this latter group, a preannounced inflation target might still be preferable to a monetary aggregate anchor, such as the monetary base or a broader measure of money.
For emerging market countries, there are broadly four key initial conditions: a mandate in support of an inflation objective and accountability for achieving this objective; macroeconomic stability; a sufficiently well developed and stable financial system; and effective policy implementation tools. The absence of some of these conditions, however, should not prevent countries from adopting inflation targeting, especially when policies are being introduced to establish the conditions in the short and medium terms. According to the authors, even if a country decides not to pursue an inflation target, the initial conditions listed in the paper are important for the successful conduct of monetary policy regardless of the monetary regime. The decision for inflation targeting should be based on the costs and benefits of this framework against alternative monetary policy regimes.
A central bank should have a clear mandate to pursue the inflation target and sufficient discretion and independence to set its monetary instruments as needed to pursue the target. Involving the government in...
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