Assessing the Empirical Evidence on Inflation Targeting and Possible Lessons for Brazil

The purpose of this chapter is to prepare the ground for the chapter that follows immediately. We assess the empirical evidence on Inflation Targeting (IT), a new policy framework designed to tame inflation, and consider whether the assessment can be helpful in studying the experience in Brazil with such strategy. This policy framework has been with us since the early 1990s and given that IT was introduced in Brazil in 1999, lessons for the latter can be ascertained. Recent work makes the point that a significant number of countries adopted this strategy, and the number is growing. For example, Sterne (2002) suggests that 54 countries pursued one form of IT or another by 1998, compared with only 6 in 1990. A more recent study (IMF, 2005) suggests that 21 countries (8 developed and 13 emerging) are now clear inflation targeters, pursuing a full-fledged IT strategy (FFIT in short). IMF (2006) has recently reported that there are 17 countries that have sought technical assistance to be able to introduce it. A number of studies have attempted to examine empirically the degree and extent of the impact of IT on inflation. We review this literature in what follows and conclude that the available empirical evidence produces mixed results. In pursuing an IT strategy, countries commit themselves to price stability as the main objective of monetary policy, along with stipulating that medium-to-long-term inflation is the nominal anchor where an inflation target is set.