Working Paper: NBER ID: w10646
Authors: Frederic S. Mishkin
Abstract: This paper explores issues in emerging market countries to make inflation targeting work for them. It starts by outlining why emerging market economies are so different from advanced economies and then discuss why developing strong fiscal, financial and monetary institutions is so critical to the success of inflation targeting in emerging market countries. Then it discusses two emerging market countries which illustrate what it takes to make inflation targeting work well, Chile and Brazil. It then addresses a particularly complicated issue for central banks in emerging market countries who engage in inflation targeting: how they deal with exchange rate fluctuations. The next topic focuses on the IMF's role in promoting the success of inflation targeting in emerging market countries. The conclusion from this analysis is that inflation targeting is more complicated in emerging market countries and is thus not a panacea. However, inflation targeting done right can be a powerful tool to help promote macroeconomic stability in these countries.
Keywords: Inflation targeting; Emerging markets; Macroeconomic stability
JEL Codes: E5; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| strong fiscal, financial, and monetary institutions (O23) | effective inflation targeting (E31) |
| weak institutions (O17) | high inflation and currency crises (F31) |
| high inflation and currency crises (F31) | undermine inflation targeting (E31) |
| currency depreciation (F31) | inflationary pressures (E31) |
| liability dollarization (F65) | financial instability of domestic firms (G32) |
| financial instability of domestic firms (G32) | adverse selection and moral hazard problems in credit markets (D82) |
| adverse selection and moral hazard problems in credit markets (D82) | economic contractions (E32) |
| inflation targeting with proper institutional support (E61) | maintain macroeconomic stability (E60) |
| IMF promoting institutional reforms (F33) | sustainability of inflation targeting (E63) |