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Inflation Targeting at 20:Inflation Targeting at 20:Achievements and ChallengesAchievements and Challenges
By Scott RogerIMF
Prepared for the 6th Norges Bank Monetary Policy Conference
Oslo, 11-12 June 2009
OverviewOverview
Since start of IT in 1989, 29 countries adopting IT. Currently 26 IT countries of which 11 high income and 15 emerging market and developing countries
Topics:• IT frameworks• Macroeconomic performance under IT• Issues and challenges facing IT
Inflation Targeting FrameworksInflation Targeting Frameworks
Main elements: Policy mandates Policy accountability Inflation targets Policy formulation
Inflation Targeting FrameworksInflation Targeting Frameworks
Policy mandates Instrument autonomy, not goal autonomy Target specification usually set jointly or by central bank
Accountability Corollary of instrument autonomy, but also reinforces it Standard mechanisms for providing accountability Increasingly forward-looking approach—emphasis on
transparency of policy process and decision making
Inflation Targeting FrameworksInflation Targeting Frameworks
Target specifications CPI 12 month rate as target Range or point target with bands
• Centered on 2 to 3 percent
• Bands typically +/- 1 percentage point; ranges 2 percentage
points Target horizons 1 to 2 years Monitoring & reporting of a range of core inflation
measures: CPI ex; trimmed means; median
Inflation Targeting FrameworksInflation Targeting Frameworks
Policy formulation Flexible IT Forecast-based, but significant differences in capability;
Standard New Keynesian models Differences in treatment of exchange rate Differences in implementation/operational frameworks—
preference for market-based over rules-based instruments, but some countries actively using both.
Performance under IT Performance under IT
Focus on three aspects of performance: Performance in achieving inflation targets Macroeconomic performance compared with alternative
frameworks Resilience of framework in face of 2007-09 global
commodity price and financial shocks
1. Performance in achieving 1. Performance in achieving inflation targetsinflation targets
During disinflation:• For high income
countries, average outcome close to target, but target range missed 60% of time;
• For low income countries, average outcome 2.3% above target, target range missed 67% of time;
Inflation outcomes during disinflation
0.00
0.02
0.04
0.06
0.08
0.10
Deviation of inflation from target (%)
Freq
uenc
y
0.00
0.02
0.04
0.06
0.08
0.10
Low income
high income
1. Performance in achieving 1. Performance in achieving inflation targetsinflation targets
During stable inflation:• For high income
countries, average outcome a little above target above target; miss target range 47% of the time
• For low income countries, average outcome a little above target; miss target ranges 36% of time
Inflation outcomes during stable inflation
0.00
0.02
0.04
0.06
0.08
0.10
-5.0
-4.0
-3.0
-2.0
-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0
Deviation of inflation from target (%)
Fre
qu
en
cy
0.00
0.02
0.04
0.06
0.08
0.10
Low income
high income
1. Performance in achieving 1. Performance in achieving inflation targetsinflation targets
Assessment: Misses of target ranges very common—may undermine
usefulness of ranges Harder to control inflation during disinflation Countries with weaker conditions may be too ambitious
on pace of disinflation Countries might use wider bands during disinflation (+/-
2 to 2.5), narrowing during stable IT (+/- 1.25 to 1.5) Supply shocks an important factor in misses by low
income countries
2. Performance of IT compared 2. Performance of IT compared to alternative frameworksto alternative frameworks
1991-00 vs. 2001-08 based on median adoption of IT in low income countries
Low income IT improvement greater than non-IT: growth gain of 0.7%; inflation down 5.8%
High income IT: inflation unchanged, small growth gain
Inflation and growth rates:
2001-08 vs. 1991-00
0
2
4
6
8
10
12
14
16
18
0 1 2 3 4 5 6
Real GDP growth (%)
CP
I inf
latio
n (%
)
0
2
4
6
8
10
12
14
16
18
Non-IT low income
IT low income
IT high income
2001-08
1991-00
1991-00
2. Performance of IT compared 2. Performance of IT compared to alternative frameworksto alternative frameworks
Low income IT experienced bigger declines in both inflation & growth than non-IT countries
High income IT experienced smaller reductions in both inflation & output volatility
Inflation and growth volatility
2001-08 vs. 1991-00
0
2
4
6
8
10
12
14
0 1 2 3 4
S.D . of GDP growth (%)
Infla
tion
vo
latil
ity (
%)
0
2
4
6
8
10
12
14
Non-IT low income
IT low incom e
IT high income
1991-00
2001-08
1. Performance in achieving 1. Performance in achieving inflation targetsinflation targets
During stable inflation:• For high income
countries, average outcome a little above target above target; miss target range 47% of the time
• For low income countries, average outcome a little above target; miss target ranges 36% of time
Inflation outcomes during stable inflation
0.00
0.02
0.04
0.06
0.08
0.10
-5.0
-4.0
-3.0
-2.0
-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0
Deviation of inflation from target (%)
Fre
qu
en
cy
0.00
0.02
0.04
0.06
0.08
0.10
Low income
high income
2. Performance of IT compared 2. Performance of IT compared to alternative frameworksto alternative frameworks
Econometric analyses based on differences in differences, controlling for external factors:
IMF (2005), Mishkin & Schmidt-Hebbel (2005); Vega & Winkelried (2005)
Differences mainly in terms of selection of comparators Findings:
• IT associated with significant reduction in inflation and inflation volatility relative to non-IT, at least for non-industrial countries
• No trade-off of inflation or inflation volatility vs. output: shift of efficiency frontier, not a movement along it
3. Resilience to 2007-09 global 3. Resilience to 2007-09 global commodity price and financial shockscommodity price and financial shocks
Commodity price shock: Low income IT countries
experienced less increase in inflation than in non-IT countries (2.3% vs. 4.7), but only slightly bigger fall in growth (-1.6% vs. -1.3%)
High income IT have lower inflation rise (1.9%) but bigger growth decline (-2.8%)
Need to disentangle from financial crisis & other factors
Inflation and growth rates, 2006-08
0
2
4
6
8
10
12
0 1 2 3 4 5 6 7
Real GDP growth (%)
CP
I in
flatio
n (
%)
0
2
4
6
8
10
12Non-IT low income
IT low income
IT high income
2006
2008
2008
3. Resilience to 2007-09 global 3. Resilience to 2007-09 global commodity price and financial shockscommodity price and financial shocks
Financial shock: Several IT countries amongst
hardest hit by crisis (Iceland, CEE countries), but not clear that IT made economies more vulnerable, or effects worse
Deterioration in CDS spreads less for IT emerging markets, suggesting markets see less risk of crisis in these countries
CDS spreads, 2007-09
0
100
200
300
400
500
600
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
CD
S sp
read
s (b
asis
poi
nts)
0
100
200
300
400
500
600Non-IT low income
IT low income
IT high income
3. Resilience to 2007-09 global 3. Resilience to 2007-09 global commodity price and financial shockscommodity price and financial shocks
Consensus forecasts vs. 2001-08 averages:
Growth expected to fall less in low income IT countries than in non-IT (-3.7% vs. -4.8%), and inflation to fall by slightly more (-2% vs. -1.7%)
Growth in high income IT countries expected to fall by 3.4%, and inflation by 1%, relative relative to 2001-08 averages
Growth and inflation:
2009-10 forecasts
vs. 2001-08 performance
0
2
4
6
8
10
-2 -1 0 1 2 3 4 5 6
Real GDP growth (%)
CP
I in
flatio
n (
%)
0
2
4
6
8
10Non-IT low income
IT low income
IT high income
2001-08
2009-10
Issues & ChallengesIssues & Challenges
Conditions for IT Adapting IT to emerging market and developing
countries Role of the exchange rate in IT IT and financial stability Price path targeting
Issues & ChallengesIssues & Challenges
Conditions for IT & adapting IT to emerging markets & developing countries
Conditions fewer, but significant challenges:• Fiscal dominance• Weak credibility• Dollarization• Data weaknesses• Limited human capital• Limited financial market development• Communications issues• Cultural issues
Issues & ChallengesIssues & Challenges
Role of the exchange rate in IT Important issue in emerging markets & developing
countries Conventional wisdom: exchange rate should not be a
target in its own right because:• Exchange rate taken into account indirectly through effects on
inflation & output• Appropriate response to exchange rate movements depends on
cause, so policy should avoid automatic responses
Issues & ChallengesIssues & Challenges
More recent analysis more equivocal:• With high dollarization, limited access to international capital
markets, exchange rate can have perverse balance sheet effects which may justify leaning against the wind (Cespedes & others (2004), Moron & Winkelried (2005), Roger & others (2009))
• Policy rule including exchange rate may be more robust to incorrect specification of model of exchange rate determination (Wolmershauser (2006)
Issues & ChallengesIssues & Challenges
IT and financial stability Mixed views on benefits of reacting directly to financial
indicators: • Arguments analogous to including exchange rate in policy
reaction function—react indirectly to implications for output & inflation
• But most models do not adequately capture macro-financial interaction
Extending policy horizon: How good are forecasts? Overburdening monetary policy: Should we focus on
other policy instruments?
Takk!
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