InflationtargetingWhathavewelearned.pdf

Inflation targeting: What have we learned? Carl E. Walsh1 University of California, Santa Cruz July 2008 This draft: January 2009 Abstract Inflation targeting has been widely adopted in both developed and emerging economies. In this essay, I survey the evidence on the effects of inflation targeting on macroeconomic performance and assess what lessons this evidence provides for inflation targeting and the design of monetary policy. While macroeconomic experiences among both inflation targeting and non-targeting developed economies have been similar, inflation targeting has improved macroeconomic performance among developing economies. Importantly, inflation targeting has not been associated with greater real economic instability among either developed or developing economics. While costs shocks, such as the large rise in commodity prices that occurred in 2007 and early 2008, force central banks to make difficult short-run trade-offs, the ability to deal with demand shocks and financial crises can be enhanced by a commitment to an explicit target. Introduction It has been almost twenty years since New Zealand became the first country to adopt the monetary policy framework now called inflation targeting. Since New Zealand paved the way, more than twenty developed and developing nations have followed, and the number of inflation targeting central banks continues to grow. Turkey and Indonesia are the most recent to join the IT club. Central banks that have adopted inflation targeting seem happy with their choice, and Canada, as one of the earliest 1 The John Kuszczak Memorial Lecture, prepared for International Experience with the Conduct of Mo