4 - Inflation targeting at twenty: achievements and challenges

Summary

Introduction

Inflation targeting was first adopted in the early 1990s by industrial countries, but now it is being adopted by a growing number of emerging market and developing countries. As of mid-2009 twenty-six countries are classified as inflation targeters, including eleven high-income countries and fifteen lower-income emerging market and developing countries. This chapter provides a review of the experience with inflation targeting, together with an overview of some issues and challenges facing the future of inflation targeting.

Section 4.2 briefly documents the spread of inflation targeting and, in particular, the increasing dominance of emerging market and developing country inflation targeters – a trend that is expected to continue.

Section 4.3 begins with an overview of the major elements of inflation-targeting frameworks, including (i) the specification of the inflation target and the handling of policy trade-offs; (ii) governance and decision-making frameworks; and (iii) communications and accountability arrangements. Broadly speaking, the analysis finds that a fairly standard model of inflation targeting has emerged. Inflation target specifications are generally quite similar – perhaps too much so – and a broad consensus has developed in favour of ‘flexible’ inflation targeting, which takes not only inflation but also output considerations into account in policy formulation. Policy accountability and communications arrangements also appear to be converging on an increasingly transparent model.