Agenor, Pierre-Richard2014-09-042014-09-042000-12https://hdl.handle.net/10986/19967In the past few years, a number of central banks have adopted inflation targeting for monetary policy. The author provides an introduction to inflation targeting, with an emphasis on analytical issues, and the recent experience of middle- and high-income developing countries (which have relatively low inflation to begin with, and reasonably well-functioning financial markets). After presenting a formal analytical framework, the author discusses the basic requirements for inflation targeting, and how such a regime differs from money, and exchange rate targeting regimes. After discussing the operational framework for inflation targeting (including the price index to monitor the time horizon, the forecasting procedures, and the role of asset prices), he examines recent experiences with inflation targets, providing new evidence on the convexity of the Phillips curve for six developing countries. His conclusions: Inflation targeting is a flexible policy framework that allows a country's central bank to exercise some degree of discretion, without putting in jeopardy its main objective of maintaining stable prices. In middle- and high-income developing economies that can refrain from implicit exchange rate targeting, it can improve the design, and performance of monetary policy, compared with other policy approaches that central banks may follow. Not all countries may be able to satisfy the technical requirements (such as adequate price data, adequate understanding of the links between instruments, and targets of monetary policy, and adequate forecasting capabilities), but such requirements should not be overstated. Forecasting capability can never be perfect, and sensible projections always involve qualitative judgment. More important, and often more difficult, is the task of designing, or improving an institutional framework that would allow the central bank to pursue the goal of low, stable inflation, while maintaining the ability to stabilize fluctuations in output.en-USCC BY 3.0 IGOactual inflationaggregate demandaggregate supplyaggregate supply curveautoregressionbank lendingcapital flightcapital marketscentral bankCentral Bank Independencecentral banksclosed economycompetitivenessConceptual Frameworkconsumersdebtdemand for moneydestabilizing effectdeveloping economiesdiscount ratedisinflationEconomic Policyeconomistselasticityequilibriumexchange rateexchange rate crisesexchange ratesfinancial marketsfinancial structurefinancial systemfloating exchange ratesforecasting inflationforecastsforeign shocksgeneral level of pricesgovernment spendingincomeincome developing countriesincrease in inflationindirect instrumentsIndustrial Countriesinflationinflation forecastsinflation rateinflation ratesinflation targetinflation targetinginflation targeting frameworkinflation targeting regimeinflation targetsinflationary pressuresinstitutional frameworkInterest Ratesintermediate goodsintermediate inputslending rateslong termlow inflationmacroeconomic modelsmetalsmonetary aggregateMonetary policyMonetary targetingmoney demandmoney growthmoney supplynominal anchornominal exchange ratenominal interest rateopen economiesoptimizationPhillips curvepolicy decisionspolicy instrumentsPOLICY RESEARCHPolicy Trade-offspotential outputPoverty Reductionprice changesprice inflationprice levelprice settingprice stabilityprivate agentsprivate consumptionpublic debtrate of inflationrate targetingreal exchangereal exchange ratereal interestreal interest ratereduction in inflationrelative pricerisk premiasavingsshort-term interest ratesstable inflationstable ratestandard deviationtradable goodstransmission mechanismtransmission processunemploymentvariable inflationwageswealth10.1596/1813-9450-2511