INFLATION TARGETING IN THE COUNTRIES WITH MIDDLE AND LOW INCOME: TRADITIONAL DILEMES AND POST-CRISIS CHALLENGES

Abstract

Introduction. It is focused on the problem inflation targeting regime evolvement in emerging market countries. The generalization of key problems is done relying on literature review and overview of empirical works. Purpose of the paper is to show how the way of thinking about inflation targeting in emerging market countries is changed according to they economic and financial development as well as they connections with global economy. It is distinct some the most disputable and progressmade arrears of inflation targeting in less developed countries: connections between price and exchange rate stability; reactions on the supply-side shocks; institutional drivers of deviations from the targets; cointegration between inflation targeting and macroprudential policy. It is fount the more country advanced in the structural reforms the less sensitive price stability to exchange rates movements is and term-of-trade shocks more resemble supply-side shocks. But central banks from emerging market countries couldn’t stay neglect of supply-side shocks because of more sensitive inflation expectations to core-inflation reaction on non-core inflation behavior. While commodity shocks may easily deteriorate movements of the most volatile components of price index supply-side shocks are more like persistent in nature. Not to react on them according to orthodox New-Keynesian theory is very risky especially then inflation expectations are not strongly anchored. Results. Deviations from inflation targets are viewed from institutional position meaning that political environment as well as factual central bank’s independence is important and markets flexibility, that minimizes costs of stronger reaction on price shocks, is a consequence of structural reforms. Financial stability in emerging markets is viewed from capital flows and exchange rates volatility perspective that may bring additional conflicts with inflation targets. Conclusions. It is stressed that monetary policy in emerging markets will benefited from more active approach on financial imbalances. That is why inflation targeting with pro-active macroprudential policy is shown as example of relevant policy-mix for better macroeconomic performance.