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An earlier version of this paper was presented at the Norges Bank 2009 Monetary Policy Conference “Inflation Targeting Twenty Years On,” 11–12 June 2009, Oslo, Norway. I am grateful to conference participants, as well as IMF colleagues, for useful comments and suggestions. Remaining errors and omissions are my own.
I would like to thank Claudia Jadrijevic Zenteno for excellent research assistance.
New Zealand passed the legislation for IT in late 1989, with implementation from the beginning of 1990.
Finland and Spain ceased IT when they entered the euro area in January 1999, and Slovakia ceased IT in January 2009 with its ERM II entry.
To facilitate comparisons over time, the figures include separately the various republics of the former Soviet Union and Yugoslavia, which became independent during the 1990s. In the pre-independence period each of the constituent republics is treated as having the same monetary policy as the federation. This avoids having the break-up of the federations affecting the relative proportions of different policy regimes. The establishment of the euro zone is shown as a shift by ERM countries to from exchange rate targeting to a multiple targets framework.
IMF discussions with member states in 2006 suggested that the number of inflation targeters in developing and emerging market economies was likely to increase four-fold over the next decade, consistent with the estimate by Husain, Mody, and Rogoff (2005) that the number of countries with exchange rate pegs may almost halve in the next 10-15 years.
High and low income country groups are based on the World Development Indicators classification of the World Bank.
A revealing review of the development of the original IT framework in New Zealand is provided by Reddell (1999).
In the case of monetary targets, instability in money demand relationships—commonly associated with financial system reforms and opening of capital markets—undermined the usefulness of monetary aggregates as policy guides. In the case of exchange rate pegs, real exchange rate targets provided no nominal anchor, while nominal exchange rate pegs left both prices and activity vulnerable to shocks affecting equilibrium real exchange rates.
In the Czech Republic and Korea, targets were initially defined in terms of core or underlying inflation measures, but both have subsequently switched to headline inflation. Thailand is currently the only country setting its target in terms of core inflation.
This section updates the analysis in Roger and Stone (2005), which was based on data for 22 countries through to mid-2004. The analysis in this paper covers 29 countries to end-2008.
Moreover, given the high variance of inflation outcomes relative to target, if the average target range in low income countries had been of the same width as in high income countries, and on the assumptions of an approximately normal distribution of outcomes, misses of target ranges would have been much higher—close to 80 percent.
If the low income countries had target ranges, on average, about the same width of those in high income countries, misses of target ranges would have been closer to 55 percent, all other things being equal.
These included 22 non-IT countries in the JP Morgan Emerging Market Bond Index (Algeria, Argentina, P.R. China (mainland), Côte d’Ivoire, Croatia, Dominican Republic, Ecuador, Egypt, El Salvador, Indonesia, Lebanon, Malaysia, Morocco, Nigeria, Pakistan, Russia, Serbia, Tunisia, Turkey, Ukraine, Uruguay, and Venezuela) plus seven similarly classified countries (Botswana, Costa Rica, Ghana, Guatemala, India, Jordan, and Tanzania).
Described as a “selective set of countries that are at the international frontier of macroeconomic management and performance: Austria, Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, Portugal, and the United States.”
The end-1999 breakpoint used in the analyses reflected the fact that the average and median number of quarters of experience with IT among emerging markets at the time corresponded to the beginning of 2000.
The difference between the groups used in this analysis and the IMF 2005 analysis (described in footnote 19) are as follows: (i) the group of non-IT economies excludes Guatemala, Ghana, Indonesia, Serbia, and Turkey, which have subsequently adopted IT, while (ii) Bulgaria has also been added to the group of relevant non-IT comparators. For high income IT economies, the group of comparator non-IT economies includes Cyprus, Denmark, the euro area, Hong Kong SAR, Japan, Singapore, Slovenia, Switzerland, Taiwan POC, and the United States. Additionally, the data sample is extended to end-2008, and the breakpoint between the earlier and later periods is shifted by one year (to the end of 2000) to reflect the change in the median date for adoption of IT.
For IT countries, the sample periods are split pre-and post IT adoption while for non-IT countries the split is set at the end of 2000, corresponding to the median adoption date of IT for the countries adopting IT.
The most comparable result in the Mishkin and Schmidt-Hebbel analysis is from the use of IV with the Control 1 group of countries, to maximize allowance for the fact that the emerging market countries adopting IT have generally been far from the frontier of macroeconomic management. In this case, the authors obtain the same estimated reduction in inflation due to adoption of IT: 4.8 percent. In the Vega and Winkelried analysis, the relevant comparisons are for developing countries adopting full-fledged IT. Their estimates of the benefit of adoption of IT in terms of inflation reduction fall in the range of 3.3 to 5.4 percentage points.
See Bevilaqua and Loyo (2004) for a discussion of how Brazil’s fledgling IT regime was stress-tested in the first few years after its introduction.
Habermeier and others (2009) provide a comprehensive discussion of the inflation surge and monetary policy responses in emerging market and developing economies.
These include Iceland, Hungary, Romania, and Serbia.
See Stone and others (2009) for an extensive overview of the role of the exchange rate in emerging market economies.
See e.g., Borio and Lowe (2002) “Asset prices, financial and monetary stability: exploring the nexus,” BIS Working Paper No. 114.