Monetary Policy under Flexible Exchange Rates : An Introduction to Inflation Targeting

In the past few years, a number of central banks have adopted inflation targeting for monetary policy. The author provides an introduction to inflation targeting, with an emphasis on analytical issues, and the recent experience of middle- and high-income developing countries (which have relatively low inflation to begin with, and reasonably well-functioning financial markets). After presenting a formal analytical framework, the author discusses the basic requirements for inflation targeting, and how such a regime differs from money, and exchange rate targeting regimes. After discussing the operational framework for inflation targeting (including the price index to monitor the time horizon, the forecasting procedures, and the role of asset prices), he examines recent experiences with inflation targets, providing new evidence on the convexity of the Phillips curve for six developing countries. His conclusions: Inflation targeting is a flexible policy framework that allows a country's central bank to exercise some degree of discretion, without putting in jeopardy its main objective of maintaining stable prices. In middle- and high-income developing economies that can refrain from implicit exchange rate targeting, it can improve the design, and performance of monetary policy, compared with other policy approaches that central banks may follow. Not all countries may be able to satisfy the technical requirements (such as adequate price data, adequate understanding of the links between instruments, and targets of monetary policy, and adequate forecasting capabilities), but such requirements should not be overstated. Forecasting capability can never be perfect, and sensible projections always involve qualitative judgment. More important, and often more difficult, is the task of designing, or improving an institutional framework that would allow the central bank to pursue the goal of low, stable inflation, while maintaining the ability to stabilize fluctuations in output.

Bibliographic Details

Main Author:	Agenor, Pierre-Richard
Format:	Policy Research Working Paper biblioteca
Language:	en_US
Published:	World Bank, Washington, DC 2000-12
Subjects:	actual inflation, aggregate demand, aggregate supply, aggregate supply curve, autoregression, bank lending, capital flight, capital markets, central bank, Central Bank Independence, central banks, closed economy, competitiveness, Conceptual Framework, consumers, debt, demand for money, destabilizing effect, developing economies, discount rate, disinflation, Economic Policy, economists, elasticity, equilibrium, exchange rate, exchange rate crises, exchange rates, financial markets, financial structure, financial system, floating exchange rates, forecasting inflation, forecasts, foreign shocks, general level of prices, government spending, income, income developing countries, increase in inflation, indirect instruments, Industrial Countries, inflation, inflation forecasts, inflation rate, inflation rates, inflation target, inflation targeting, inflation targeting framework, inflation targeting regime, inflation targets, inflationary pressures, institutional framework, Interest Rates, intermediate goods, intermediate inputs, lending rates, long term, low inflation, macroeconomic models, metals, monetary aggregate, Monetary policy, Monetary targeting, money demand, money growth, money supply, nominal anchor, nominal exchange rate, nominal interest rate, open economies, optimization, Phillips curve, policy decisions, policy instruments, POLICY RESEARCH, Policy Trade-offs, potential output, Poverty Reduction, price changes, price inflation, price level, price setting, price stability, private agents, private consumption, public debt, rate of inflation, rate targeting, real exchange, real exchange rate, real interest, real interest rate, reduction in inflation, relative price, risk premia, savings, short-term interest rates, stable inflation, stable rate, standard deviation, tradable goods, transmission mechanism, transmission process, unemployment, variable inflation, wages, wealth,
Online Access:	http://hdl.handle.net/10986/19967
Tags:	Add Tag No Tags, Be the first to tag this record!