Who is responsible for emerging market inflation improvements?

• Position: A SYMPOSIUM OF VIEWS

One of the pleasant surprises of recent years has been the decline in emerging market inflation. Many if not most emerging market governments during this period tied their currencies in one form or another to the U.S. dollar. Here's the issue: Did emerging markets achieve success on the inflation front by piggy-backing on the low U.S. inflation environment? Or was the reduction in emerging market inflation a phenomenon of developing world policymakers' own making, more the result of responsible monetary policy? Can the emerging markets maintain price stability if the United States doesn't?

The views of seven experts.

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Enhanced domestic policy discipline was responsible.

GUILLERMO ORTIZ MARTINEZ

Governor, Central Bank of Mexico, and Chairman, Bank for International Settlements Central Bank Governance Group

After the early 1990s, emerging economies exhibited a remarkable progress in reducing inflation, thus adding their own effort to the global disinflation observed after industrial countries' own inflations diminished. Diverse factors, such as enhanced competition, the growing presence of labor-abundant countries in trade and, importantly, productivity growth and improvements in monetary policy, have been argued to have contributed to this global process. Undoubtedly, these factors may have eased emerging markets' disinflation by improving the overall inflationary environment.

This does not mean that emerging markets' disinflation only reflects achievements in industrial countries and, in particular, that they piggy-backed on the low inflation environment by linking their currencies, say, to the U.S. dollar. In fact, their high inflation episodes generally occurred when rigid exchange rate regimes were in place. Once these countries adopted more flexible regimes, they also achieved reductions of inflation.

Thus domestic factors, related to a greater consensus toward stability and leading to enhanced fiscal discipline and central bank autonomy, are seen to have played a key role in the ability of these countries to sustain low inflation levels in a context of flexible exchange rate arrangements. This in turn suggests that, while global conditions were helpful, the disinflation in emerging economies is to a large extent consequence of improvements in their policy frameworks. Mexico illustrates the above. Its success in reducing inflation in a fast and sustainable manner after the peso crisis reflects three interdependent pillars on which Mexico's current stability rests: i) a flexible exchange rate; ii) an independent monetary policy; and, iii) healthy public finances.

Clearly, enhanced policy discipline in emerging economies has made them more resilient to shocks. In this context, as long as sound macroeconomic policies are maintained, these countries will be better armored to adjust efficiently to any changes in the global economic environment.

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The emerging market economies have a tough choice.

TADASHI NAKAMAE

President, Nakamae International Economic Research

Emerging market currencies that were pegged, officially or unofficially, to the dollar were able to avoid inflation during the first half of the decade. Most emerging market economies managed to keep their currencies floating steadily against the U.S. dollar and prevented wild fluctuations. This helped because the United States kept its own inflation in check during this period. Commodities, denominated in dollars, also dodged large price hikes, another boon. Since 2005 however, inflation started to creep up in the United States, while...