The inconclusive debate among academic economists about the merits and macroeconomic consequences of inflation targeting (IT) has just received a fresh impetus that is particularly relevant for developing countries aspiring to adopt IT.
The proponents of IT have argued that enhanced transparency and accountability associated with this monetary policy framework allow IT central banks to more firmly anchor inflation expectations. This is providing policymakers with more room to expand the economy in the face of adverse shocks without jeopardizing the credibility of monetary policy.
A recent IMF working paper, titled “Settling the Inflation Targeting Debate: Lights from a Meta-Regression Analysis”, has offered the following key findings on “The Inflation Targeting Debate”:
“… IT adoption is likely to bear more fruits (price and output stability) when fully implemented in developing countries. Indeed, monetary policy credibility has yet to be earned in these countries, such that a successful implementation of IT may help anchor inflation expectations more firmly and close the credibility gap.
But key preconditions need to be met for IT to yield beneficial effects, including notably sound fiscal positions, deep financial system, and greater exchange rate flexibility.”