Inflation Targeting in Emerging Market Economies

This paper assesses inflation targeting in emerging market economies (EMEs) and develops applied prescriptions for the conduct of monetary policy and inflation-targeting design in EMEs. We verify that EMEs have faced more acute trade-offs—higher output and inflation volatility—and worse performance than developed economies. These results stem from more pronounced external shocks, lower credibility, and a lower level of development of institutions in these countries. To improve their performance, we recommend high levels of transparency and communication with the public and the development of more stable institutions. At an operational level, we propose a procedure that a central bank under inflation targeting can apply and communicate when facing strong supply shocks, and we suggest a monitoring structure for an inflation-targeting regime under an International Monetary Fund (IMF) program.