InflationTargeting.pdfVIP

Inflation Targeting Guillermo Ortiz Martínez INTRODUCTION This paper discusses several issues regarding inflation targeting to illustrate how this well-known framework has influenced the implementation of monetary policy in several economies, particularly in emerging markets. It also discusses some of the challenges ahead. Over the years, it has been clearly accepted that one of the contributions of inflation tar- geting has been its provision of a framework within which to systematically analyze and discuss monetary policy. As will be argued, this framework is flexible enough to permit the use of several analytical tools, a feature that has led central banks across the world to en- gage in research projects that have improved our understanding of how the economy works and of the role played by monetary policy. Despite the obvious general contribu- tions just mentioned, some of the literature that has analyzed the benefits of the inflation- targeting regime will also be discussed, in order to show that the benefits for developing economies have been, predominantly, of a different nature than those experienced in industrialized economies. Based on the review of the characteristics of this framework and on the benefits it has brought to the economies that have adopted it over the past decade and a half, comments will also be made on some of the challenges faced by central banks that conduct mone- tary policy under this framework. This paper comprises four sections. The first discusses the rationale for an inflation- targeting framework to conduct monetary policy. It is evident from this rationale that in- flation targeting defines a set of rules that attempts to induce policy-makers to make sen- sible monetary policy decisions. The second section describes the process through which the inflation-targeting framework has been adopted in some countries in recent years, and reviews the literature on the benefits of the framework in these