Optimal Inflation and Inflation Targeting: International Experience

Abstract

The relationship between optimal, threshold and target inflation regarding the inflation targeting policy has been analyzed on the example of some countries. The objective of the article is to identify the features of achieving the inflation target by countries with different levels of economic development. As part of the descriptive analysis, the country comparison method has been applied according to the parameters of estimated inflation thresholds, actual targets and permissible targeting ranges, sustainability of targets and time periods. In terms of the case study approach, countryspecifc factors for changing the inflation target and the threshold inflation rate have been studied. The relationship between optimal, threshold and target inflation has been substantiated. The experience of achieving the inflation target in 17 countries in 2009–2018 has been presented. The actually targeted and estimated threshold levels of inflation have been compared. The article reveals the features of achieving the inflation target by countries with different levels of disclosure and economic development. It has been concluded that the inflation threshold level is the upper limit of the actually established target inflation rate or its range. Despite the downward trend in estimates of the threshold level, the downward trend in target inflation has not been pronounced. Open economy and sensitivity to changes in external conditions is a precedence factor of interest rate policy specifc to emerging market countries. As a result, the countries have to choose more flexible policy, accommodative inflation targeting, or the policy of “leading indicators”. It is focused primarily on managing inflation expectations. Despite the ambiguity of the external environment, the inflation targeting policy in Russia retains the potential for anchoring inflation expectations at a chosen target level.