HasInflationTargetingBeenEffective.pdfVIP

INTERNATIONAL JOURNAL OF BUSINESS, 15(4), 2010 ISSN: 1083?4346 Has Inflation Targeting Been Effective? Yutaka Kurihara* Professor of International Economics and Finance Dean/Faculty of Economics, Aichi University 1-1 Machihata-cho Toyohashi-shi Aichi-ken 441-8522 JAPAN kurihara@aichi-u.ac.jp ABSTRACT Inflation targeting has been conducted in many countries, with the number increasing rapidly since the beginning of the 1990s. The pros and cons of adopting this policy have received much attention. Generally, countries that have conducted inflation targeting have experienced good economic performance. Policymakers have become increasingly concerned with inflation stabilization. The increased focus on inflation stabilization has contributed to lowering inflation rates from the high rates experienced in the 1970s and 1980s. This paper has two purposes. First, it will analyze why countries adopt inflation targeting. This paper shows that the openness of the economy, the fiscal surplus, and the central bank’s independence correlate negatively with the adoption of inflation targeting. Past inflation is not a motive for the introduction of inflation targeting. It will also evaluate the costs of inflation stabilization between targeting and nontargeting cases, in particular to determine the sacrifice ratio, which declines during inflation targeting periods. JEL Classification: F33, E58 Keywords: Central Bank; Inflation Targeting; Monetary Policy; Sacrifice Ratio * I thank Akihiro Amano and Naoyuki Yoshino for their helpful comments and suggestions. 412 Kurihara I. INTRODUCTION Since the 1990s, about 30 countries have adopted inflation targeting as their framework for the conduct of moneta