Inflation-Target Design: Changing Inflation Performance and Persistence in Industrial Countries

Finding a monetary regime that can deliver some form of price stability, as well as satisfactory economic performance, always has been explained more convincingly in theory than in practice. Consequently, governments have, over time, experimented with policies ranging from some metallic standard (for example, gold, silver, or bimetallic) to various forms of exchange rate pegging (for example, Bretton Woods or the European exchange rate mechanism) and the introduction of currency boards (as in Hong Kong, Argentina, or Estonia, for example). The latest fashion in monetary policy formulation is a renewed interest in inflation targeting.1 The policy has attracted the attention of policymakers and the public alike. Although imperfect, inflation targeting seemingly lacks some of the drawbacks of other policy regimes. The rationale for inflation targeting and the ingredients of an inflation-targeting policy are reviewed briefly in the following two sections.2 There has, however, been relatively less emphasis placed on comparative assessments of inflation performance under inflation targeting among the group of countries that have formally adopted the policy. Does inflation targeting influence the time series properties of inflation? To explore this issue, I estimate a simple model that illustrates whether inflation persistence has changed in a significant fashion in inflation targeting vs. non inflation-targeting countries. The paper concludes by noting that it is too early for a definitive assessment of inflation targeting. Yet, from the standpoint of economic analysis and empirical performance to date, a policy of inflation control offers as good a chance as any policy regime to produce consistently good macroeconomic performance.