The Past and Future of Inflation Targeting: Implications for Emerging-Market and Developing Economies

Abstract

Inflation targeting (IT) was started in 1990 and spread subsequently to 35 other advanced and emerging/developing countries until now. Drawing from existing and new research, this paper takes stock of IT’s past performance and limitations, and discusses its main challenges to remain the monetary regime of choice in the future. Adopting and developing IT takes different forms but central bank gradually converge to a common policy framework—although the framework itself continues evolving over time. There is significant evidence on the success of IT—in particular for emerging economies and lower income countries—in improving central bank’ institutional set-up, conduct of monetary policy, and macroeconomic performance. The last decade presented the greatest challenges to IT, due to the commodity price shock of 2006–2007 and then the Global Financial Crisis and its aftermath. The future of IT in general, and in developing countries in particular, will be determined by how well central bank manage the transition toward full-fledged stationary target IT; improve their independence, transparency, and accountability; strengthen flexible IT without giving up low inflation as the key policy mandate; and evaluate seriously adoption of price-level targeting. Continuing IT adoption in developing countries, including India recently, is an encouraging sign of their capacity to face these challenges.