Working Paper: NBER ID: w10019
Authors: Arminio Fraga; Ilan Goldfajn; André Minella
Abstract: This paper assesses inflation targeting in emerging market economies (EMEs), and develops applied prescriptions for the conduct of monetary policy and inflation-targeting design in EMEs. We verify that EMEs have faced more acute trade-offs higher output and inflation volatility and worse performance than developed economies. These results stem from more pronounced external shocks, lower credibility, and lower level of development of institutions in these countries. In order to improve their performance, we recommend high levels of transparency and communication with the public and the development of more stable institutions. At an operational level, we propose a procedure that a central bank under inflation targeting can apply and communicate when facing strong supply shocks, and suggest a monitoring structure for an inflation-targeting regime under an IMF program.
Keywords: inflation targeting; emerging markets; monetary policy
JEL Codes: E31; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| external shocks (F69) | inflation volatility (E31) |
| lower institutional credibility (D02) | inflation volatility (E31) |
| external shocks (F69) | higher expected inflation (E31) |
| lower institutional credibility (D02) | higher expected inflation (E31) |
| higher expected inflation (E31) | actual inflation rates (E31) |
| lack of credibility (D83) | deviations from inflation targets (E31) |
| transparency and communication (G38) | effectiveness of monetary policy (E52) |
| robust monitoring structure (E63) | performance of inflation targeting (E52) |