Overview on Inflation Targeting as a Monetary Policy Strategy

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INTRODUCTION

Since the 1990s, a large number of industrial countries and a growing number of emerging market and transition economies have adopted inflation targeting as their monetary policy strategy. During the implementation they face many challenges. However, there is no established pattern so countries must learn along the way from one another and more importantly from their own experience.
This paper provides an overview on inflation targeting as a monetary policy strategy, necessary preconditions for its successful implementation, its advantages and disadvantages and issues and challenges that emerging market and transition economies face while defining and implementing this monetary policy strategy.

Inflation targeting as
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Different literature suggests five criteria that describes and defines the spirit of inflation targeting: “1. Public announcement of a numerical target for inflation, 2. a commitment to price stability as the overriding goal of policy, 3. the use of an information-inclusive strategy, 4. Adoption of high levels of transparency, 5. Accountability.”
Even if inflation targeting was introduced in developed market economies, this monetary policy framework has been adopted by a growing number of emerging market and transition economies as well. According to IMF, in 2009 twenty six countries have been classified as inflation targeting. However, numerous empirical studies and far most important, practice showed that success of inflation targeting and its adoption varies across emerging market and transition economies since it depends on diverse factors such as economic structure and level of income for example. In brief, the exchange rate and financial crises in 1990s made inflation targeting “increasingly attractive alternative” for many emerging market and transition economies.

Preconditions for inflation targeting

According to literature, in order to adopt inflation targeting, central bank needs to satisfy certain preconditions. Jeffery D. Amato in his paper stated that those preconditions are important for adoption and

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