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Monetary Policy Under Flexible Exchange Rates: an Introduction to Inflation Targeting

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  • Pierre-Richard Agénor

Abstract

This paper provides an introduction to inflation targeting, with a particular emphasis on analytical issues and the recent experience of developing countries. After presenting a formal framework, it discusses basic requirements for inflation targeting and how such a regime differs from money and exchange rate targeting regimes. The operational framework of inflation targeting (including the price index to monitor, the target horizon, forecasting procedures, and the role of asset prices) is then discussed. Next, recent experiences with inflation targets are examined. The last part of the paper focuses on some current research issues in the literature, including the role of nonlinearities regarding both policy preferences and the slope of the output-inflation tradeoff.), uncertainty (about behavioral parameters and transmission lags), and the treatment of credibility in empirical models of inflation. New evidence on the convexity of the Phillips curve is also provided for six developing countries.

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  • Pierre-Richard Agénor, 2001. "Monetary Policy Under Flexible Exchange Rates: an Introduction to Inflation Targeting," Working Papers Central Bank of Chile 124, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:124
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    1. Antonio Fat¡S & Ilian Mihov & Andrew K. Rose, 2007. "Quantitative Goals for Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(5), pages 1163-1176, August.
    2. Reginaldo P. Nogueira Jnr, 2006. "Inflation Targeting and the Role of Exchange Rate Pass-through," Studies in Economics 0602, School of Economics, University of Kent.
    3. Svensson, Lars E.O., 2010. "Inflation Targeting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 22, pages 1237-1302, Elsevier.
    4. Jesus M. Garcia-Iglesias & Rebeca Muñoz Torres & George Saridakis, 2013. "Did the Bank of Mexico follow a systematic behaviour in its transition to an inflation targeting regime?," Applied Financial Economics, Taylor & Francis Journals, vol. 23(14), pages 1205-1213, July.
    5. Agénor, Pierre-Richard & Bayraktar, Nihal, 2010. "Contracting models of the Phillips curve empirical estimates for middle-income countries," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 555-570, June.
    6. Amato, Jeffery D. & Gerlach, Stefan, 2002. "Inflation targeting in emerging market and transition economies: Lessons after a decade," European Economic Review, Elsevier, vol. 46(4-5), pages 781-790, May.
    7. Ferro, Gustavo, 2007. "Metas de inflación ¿qué hay de nuevo bajo el sol? [Inflation Targeting. What's new under the sun?]," MPRA Paper 15069, University Library of Munich, Germany, revised 11 Mar 2008.
    8. Gongpil Choi, 2003. "Structural Changes and the Scope of Inflation Targeting in Korea," International Economic Journal, Taylor & Francis Journals, vol. 17(3), pages 113-142.
    9. Reginaldo P. Nogueira Junior & Miguel Leon-Ledesma, 2008. "Exchange Rate Pass-Through Into Inflation: The Role of Asymmetries and NonLinearities," Studies in Economics 0801, School of Economics, University of Kent.
    10. Rebeca I Muñoz Torres, 2005. "Monetary Policy Rules and Inflation Targets in Emerging Economies Evidence for Mexico and Israel," Money Macro and Finance (MMF) Research Group Conference 2005 3, Money Macro and Finance Research Group.
    11. International Monetary Fund, 2008. "Constraints on the Design and Implementation of Monetary Policy in Oil Economies: The Case of Venezuela," IMF Working Papers 2008/142, International Monetary Fund.
    12. Reginaldo P. Nogueira Jnr, 2006. "Inflation Targeting, Exchange Rate Pass-Through and 'Fear of Floating'," Studies in Economics 0605, School of Economics, University of Kent.
    13. Levin, Andrew T. & Piger, Jeremy M. & Natalucci, Fabio M., 2004. "Explicit inflation objectives and macroeconomic outcomes," Working Paper Series 383, European Central Bank.
    14. Syed Imran Ali Meerza, 2020. "Do Preconditions of Inflation Targeting Framework Matter?," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 12(5), pages 1-51, May.
    15. Aliyu, Shehu Usman Rano & Englama, Abwaku, 2009. "Is Nigeria Ready for Inflation Targeting?," MPRA Paper 14870, University Library of Munich, Germany, revised 26 Apr 2009.
    16. Reginaldo Pinto Nogueira Junior, 2009. "Inflation Targeting and Fear of Floating in Brazil, Mexico and South Korea," Economia, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 10(2), pages 195-209.
    17. Gongpil Choi, 2003. "The Choice of Monetary Regime for Post-Crisis Asia. The Case of South Korea," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 1137-1160.
    18. Rageh, Rania, 2010. "Interest rate rule for the conduct of monetary policy: analysis for Egypt (1997:2007)," MPRA Paper 26639, University Library of Munich, Germany.
    19. Gongpil Choi, 2001. "Structural changes and the scope of inflation targeting in Korea," Pacific Basin Working Paper Series 2001-05, Federal Reserve Bank of San Francisco.
    20. Ball, Christopher P. & Reyes, Javier, 2008. "Inflation targeting or fear of floating in disguise? A broader perspective," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 308-326, March.
    21. Chiranjivi, GVS & Sensarma, Rudra, 2023. "The effects of economic and financial shocks on private investment: A wavelet study of return and volatility spillovers," International Review of Financial Analysis, Elsevier, vol. 90(C).

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