## _wp09161

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---

### I. Introduction
- Scope:
  - Presents experiences of selected countries (Canada, Chile, Czech Republic, Hungary, Israel, Poland, Romania, and Turkey) in introducing and implementing inflation targeting (IT).
  - Discusses: (i) motivation for adopting IT; (ii) meeting elements/conditions for IT; (iii) transition to full-fledged IT (FFIT) and coordination with other policies; (iv) benefits from adopting IT; (v) implementation challenges; (vi) lessons from country experiences.
- Time coverage:
  - Synthesis of country experiences until 2007 based on central bank studies; experiences from 2007–2008 based on Habermeier and others (2009).

### II. Motivation for Adopting Inflation Targeting
- Common motivations:
  - Difficulty with other nominal anchors (exchange rate and monetary targeting) in controlling inflation and anchoring expectations.
  - Desire to lower the rate of inflation and anchor inflation expectations via a simple observable target.
  - Experience of success in early IT adopters encouraged adoption in later countries.
- Country-specific drivers (preserved verbatim excerpts):
  - Canada (1991): Difficulty with other nominal anchors; High inflation; Introduction of a VAT type tax.
  - Chile (1990): Difficulty with other nominal anchors; High inflation.
  - Czech Republic (1998): Difficulty with other nominal anchors; High inflation; Economic crisis; Success of other IT countries; seen as the only option after 1997 crisis.
  - Hungary (2001): Difficulty with other nominal anchors; High inflation; Need for faster progress in reducing inflation.
  - Israel (1992): Difficulty with other nominal anchors; High inflation; used as input to choice of slope for crawling peg regime.
  - Poland (1998): Difficulty with other nominal anchors; High inflation; Heavy capital inflows; enhancing credibility for disinflation.
  - Romania (2005): Difficulty with other nominal anchors; Success of other IT countries; To help meet criteria for ERM II and euro adoption; heavy capital inflows; enhancing credibility.
  - Turkey (2006): Difficulty with other nominal anchors; High inflation; Economic crisis; Success of other IT countries; seen as only option after 2001 crisis; during 2002-05 implicit IT was implemented.
- Notes:
  - In some cases (Israel), IT adoption was used instrumentally (e.g., to choose crawling peg slope).
  - Canada adopted inflation reduction targets in early 1991 partly in response to the expected inflationary impact of a goods and services tax.

### III. Conditions at the Time of Introducing Inflation Targeting
- Main finding:
  - Countries did not need to satisfy all preconditions at the outset to implement IT successfully; many elements were built gradually after adoption.
- Elements commonly present at IT outset:
  - Price stability as overriding goal (even if other objectives existed).
  - Central bank instrument independence (in practice).
  - Prohibition or limitation of government access to central bank financing (absence of fiscal dominance).
  - Reasonable capacity to affect short-term interest rates.
  - Financial systems and markets sufficiently stable and developed to transmit monetary actions to market rates.
- Elements commonly missing or weak at outset:
  - Modeling/forecasting capacity.
  - Fully developed economic databases.
  - Strong understanding and functioning of the transmission mechanism.
  - Legal/goal independence of the central bank in some cases.
  - Some countries maintained dual nominal anchors (exchange rate plus inflation) and abandoned the exchange rate anchor gradually.
- Selected country-level factual entries (preserved exactly where provided):
  - Canada: Low inflation as one of the monetary policy goals; De facto instrument independence; No fiscal dominance; Effective control over short-term interest rates; Reasonable understanding of transmission mechanism; Well-developed financial markets; Healthy and stable financial system; Informal goal independence; No formal mechanism for accountability initially.
  - Chile: Full independence (goal and instrument); No fiscal dominance; Financial system stability; Reasonable control over short-term interest rates; Presence of a dual anchor (crawling band until 1999); Modeling/forecasting capacity limited; Basic understanding of transmission mechanism.
  - Czech Republic: No fiscal dominance; Instrument independence; Effective monetary policy implementation with key interest rate; Reasonably developed financial markets; Missing: Price stability mandate; Fragile banking system; No experience in forecasting inflation; Little credibility/accountability; No adequate organizational structure; Little political support.
  - Hungary: Price stability as primary goal and CB independence at time of IT introduction; Reasonable financial system stability; Dual anchor (ER band, widened at IT adoption); Modeling/forecasting capacity building gradually; No fiscal rule in place.
  - Israel: No fiscal dominance; Reasonable control over short-term interest rates; Increasing actual CB independence; Well-developed financial markets; Weak legal independence; Presence of dual anchor (crawling band, widened in steps).
  - Poland: Institutional commitment to price stability; No fiscal dominance; Reasonable control over short-term interest rates; Instrument independence; Presence of dual anchor (crawling band, widened in steps after IT adoption and eventually floated); Not very well developed forecasting capacity.
  - Romania: Institutional commitment to price stability; No threat of fiscal dominance; Reasonable control over short-term interest rates; Full operational and institutional independence; Forecasting/modeling capacity development ongoing.
  - Turkey: No fiscal dominance; Institutional commitment to price stability; Price stability primary objective set jointly with government; Instrument independence; Forecasting/modeling capacity development ongoing; Understanding of transmission mechanism improving.

### IV. Transition to Full-Fledged Inflation Targeting (FFIT)
- Definition:
  - Transition begins with announcement of intention to adopt IT and ends when most elements of full-fledged IT (FFIT) are in place; FFIT typically entails a floating exchange rate and abandonment of other nominal anchors.
- Typical paths:
  - Gradual (implicit/partial IT) — maintain some other anchor (e.g., exchange rate) while signaling inflation objectives; build institutional capacity over time.
  - Big-bang — rapid move to formal IT after short preparation; requires intensive capacity building post-adoption.
- No firm conclusion on superior strategy; choice reflected starting conditions and urgency.
- Country transition timelines (preserved exactly from source Table 4 excerpts):
  - Canada — Big-bang approach; Beginning of transition: Summer 1990; Adoption of FFIT: February 1991; Period of transition: Very short transition period, with all the work done internally at the central bank, with some exploration of the NZ announcement in 1989. Communication efforts for formal accountability enhanced gradually.
  - Chile — Gradual approach; Beginning of transition: September 1990; Adoption of FFIT: September 1999 (with full peso float); Period of transition: Long transition period to FFIT, with the crawling band abandoned in 1999.
  - Czech Republic — Big-bang approach; Beginning of transition: December 1997; Adoption of FFIT: Early 1998; Period of transition: Very short: adopted after a few months of technical preparations, with further refinements continuing until 2001-02. Medium term targets adopted from 2002.
  - Hungary — Gradual approach; Beginning of transition: June 2001 (official announcement of a partial IT regime); Adoption of FFIT: February 2008 (with forint’s full float); Period of transition: Gradual transition period to FFIT, with the horizontal exchange rate band in place until Feb 2008, although most other elements of FFIT were in place since [text truncated in source].
- Country transition experiences (additional excerpts):
  - Israel — Gradual approach; Key dates: December 1991; June 1997; Long transition period; shekel floated de facto after June 1997; full de jure float since mid-2005; Medium term targets adopted since 2000.
  - Poland — Relatively rapid and smooth; Key dates: June 1998 (announcement); April 2000 (full float); Short transition period; Medium term targets since October 1999.
  - Romania — Gradual approach; Key dates: July 2004 (internal IT); August 2005 (partial IT); Relatively long transition process; partial IT introduced relatively fast with intensive bilateral/Fund TA.
  - Turkey — Gradual approach; Key dates: 2002 (implicit IT); January 2006; Long implicit IT period until formal adoption; emphasis on technical infrastructure, decision-making process, and communications; monetary aggregates used as complementary anchors.

### V. Coordination of Supporting Reforms and Capacity Building
- Figure themes and operational milestones (preserved as thematic list):
  - IT capacity; FX market; Capital inflow liberalization; Capital outflow liberalization; Monetary policy operational capacity; Intervention policies; FX risk management and regulation.
  - Exchange rate regimes referenced: Crawling Band; Basket Peg w ith +/- 0.5 % Band; +/- 7.5 % Band; Managed Float; Free Float; Horizontal Band; Craw ling Fan (de facto float); Peg USD/Basket.
  - Operational tools introduced over time: policy rate implementation; Interbank rate as operational target; O/N standing facility; Repo operations; Full corridor system; Continuous interbank market; Exchange traded FX options; OTC FX options; first interbank broker.
  - Intervention practices documented: central bank intervenes inside band smoothing volatility; intervention volumes published; interventions stopped (formal policy of no intervention); smoothing operations inside the band.
  - Capital account liberalization milestones and FX risk regulation steps were sequenced alongside market instrument liberalization (forwards, swaps, futures, options, NDFs) and prudential FX risk measures (limits on net open FX positions, capital charges, reporting).

### VI. Benefits of Inflation Targeting
- Documented benefits across sample countries:
  - IT contributed to authorities’ efforts to disinflate.
  - Inflation expectations were better anchored and showed some signs of becoming more forward looking.
  - Floating exchange rate regimes accompanying IT resulted in a self-correcting mechanism that became an efficient shock-absorber (examples: Chile, and Poland).
  - There has been some reduction in exchange rate passthrough.
  - Communication and transparency have improved.
  - IT enabled clear institutional assignment of responsibilities for inflation control (example: Poland).
  - IT had a disciplining effect, helping to accelerate the process of building key elements that enhance successful implementation of IT (examples: Czech Republic, Turkey, and Romania).
  - The quality of policy debate has also improved (example: Czech Republic).
- Factors contributing to IT success:
  - A clear mandate and central bank independence.
  - Commitment to and consensus within the central bank on the importance of IT.
  - Clear communication, political and public support.
  - Forecasting and setting interest rates according to the relationship between forecast inflation and the target.
  - Supportive fiscal and financial policies.
  - A clear analytical basis for monetary decision-making.
  - A good understanding of the transmission mechanism.
  - Effective capacity to implement floating exchange rate regimes.
  - Learning from other country experiences.

- Selected country benefit highlights (preserved verbatim where provided):
  - Canada: (Overall benefits summarized in section headings; Monetary Policy Report introduced only in 1995).
  - Czech Republic: Inflation has permanently fallen to average EMU levels, but remains very volatile, and so does output; Bank’s credibility increased substantially; survey expectations are very well anchored on the target; monetary policy more transparent, systematic, informed.
  - Hungary: Inflation declined to a stable low inflation environment; credibility gains; monetary policy more transparent and systematic.
  - Israel: Greatly improved financial & overall macro stability, anchoring expectations, and confidence of foreign investors; monetary policy more transparent/systematic/informed.
  - Poland: Completion of disinflation; reinforced central bank credibility; reduced inflation and output volatility; inflation expectations reduced though largely adaptive; monetary policy more transparent, systematic, informed.
  - Romania: Too early to tell on macro performance; increased monetary policy transparency.
  - Turkey: During implicit IT period, inflation and output volatility reduced substantially; CB credibility improved extensively; decision making more transparent and systematic.

### VII. Challenges in Implementing IT
- A. Challenges Faced to mid-2007 (opening observation):
  - While not all the so-called preconditions turned out to be needed at the time of IT, the absence of some of the elements made implementation more challenging.
- Implementation challenges (country examples and common issues):
  - Conflict between simultaneous inflation and exchange rate targets:
    - Chile, Hungary, Israel: Interest rates needed for inflation targets inconsistent with rates to keep currencies within exchange rate bands; sterilization costs; wide bands sometimes binding; elimination of exchange rate targets removed constraints (Chile 1999; Israel 1997; Hungary 2008).
  - Difficulties in modeling and forecasting:
    - Inadequate data series; rapid structural shifts; imperfectly understood transmission mechanisms (Chile, Czech Republic, Hungary, Israel, Poland, Romania, Turkey).
    - Food and regulatory prices pronounced in CPI (Poland, Romania).
    - Consequences: excessive tightening, activity fluctuations, attacks on central bank independence (Czech Republic).
  - Fiscal weaknesses and risk premia:
    - Hungary: large-scale fiscal-origin shocks required repeated monetary tightening and caused high interest rate volatility.
    - Canada: fiscal/legal issues slowed fall in inflation expectations; real rates fell appreciably only after federal budgets of 1995 and 1996.
    - Turkey (2002-05 implicit IT): focus on fiscal reforms and communication rather than raising interest rates.
  - Underdeveloped financial markets:
    - Romania: infrequent government debt issues, poorly developed derivatives markets, illiquid stock exchange impeded reliable market assessment.
  - Other practical challenges:
    - Backward-looking inflation indexation of prices, wages, assets (Chile, Israel).
    - Organizational challenges in expertise, research capacity, staff coordination (Czech Republic, Poland).
    - Difficult choices: headline vs. core inflation, target level/range, policy horizon, speed of disinflation (Poland).
    - Early adopters lacked foreign precedents; inadequate preparation time when credibility had to be established rapidly (Canada, Chile, Israel, Czech Republic, Turkey).

### Mid-2007 to mid-2008: Commodity Price Shocks and Policy Responses
- Shock and general response:
  - Surge in food and energy prices from mid-2007 to mid-2008 tested IT credibility; most IT countries overshot official inflation targets.
  - Most IT countries did not revise officially-announced inflation targets in response to rising inflation, except Turkey.
- Turkey’s target revision (preserved exactly):
  - Turkey revised the target upward in June 2008 for 2009-2011 after extending the target horizon and revising the inflation forecast, aligning targets with rising inflation forecasts.
  - Turkey revised the target from 4% to 7.5%, 6.5%, 5.5% in 2009, 2010, 2011.
- Common policy responses:
  - Majority tightened policy rates to anchor expectations and limit second-round effects (Chile, Czech Republic, Hungary, Israel, Poland, Romania).
  - Some central banks emphasized differing return-to-target timings by circumstance.
  - Nominal or real exchange rate appreciation helped limit passthrough (Czech Republic, Hungary, Israel, Poland).
  - Some combined higher interest rates with prudential measures (Romania).
  - Tight fiscal stance provided support in Hungary and Poland.
- Selected policy-rate changes and actions (as of August 2008) preserved exactly from Table 5:
  - Chile: Yes overshot (Aug 2007); Raised key policy rate (275 bp since Jul 2007).
  - Czech Republic: Yes overshot (Fall 2007); Raised key policy rate (125 bp from Jan 2007); Let exchange rate appreciate; Lowered the key rate 25 bp on August 7, 2008 given strong koruna appreciation and downside inflation risks.
  - Hungary: Yes overshot (Fall 2006); Raised key policy rate (100 bp since Mar 2008); Abandoned the band (Feb 2008) and let the forint float; Tight fiscal policy.
  - Israel: Yes overshot (End 2007); Raised key policy rate (75 bp since May 2008); Let exchange rate appreciate.
  - Poland: Yes overshot (End 2007); Raised key policy rate (200 bp since Apr 2007); Let exchange rate appreciate; Tight fiscal policy.
  - Romania: Yes overshot (Fall 2007); Raised key policy rate (325 bp since Oct 2007); Prudential measures for credit.
  - Turkey: Yes overshot (Fall 2007); Raised key policy rate (150 bp since Apr 2008); Revised the target from 4% to 7.5%, 6.5%, 5.5% in 2009, 2010, 2011.
- Inflation dynamics and expectations:
  - Headline inflation pressures began to ease around mid-2008 due to declining commodity prices and indications of global slowdown.
  - Quick reduction hindered by second-round effects and policy transmission lags; markets often viewed actions as too little and too late.
  - IT countries continued to exceed mid-points or upper bands of official targets; inflation expectations remained elevated in most countries for 2008.
  - Rise in inflation expectations greater where real policy rates declined the most.
  - Inflation expectations relatively well contained in some countries (Czech Republic, Hungary, Israel, Poland) and had come down for 2009 from 2008 levels for many countries despite overshooting.

### VIII. Lessons from Country Experiences and Policy Recommendations
- General conclusions:
  - Absence of some conditions should not discourage transition toward IT; premature announcement of IT before a minimum set of conditions are in place should be avoided.
  - No single most effective path to adopt IT; many successful IT countries lacked some conditions at the outset and worked to establish them over time and by learning-by-doing.
  - Adoption of IT tends to promote development of supporting elements; establishing some elements can be mutually reinforcing and accelerate progress toward FFIT.
- Essential elements that made IT more feasible (listed in source):
  - (i) price stability as the overriding monetary policy goal;
  - (ii) absence of fiscal dominance;
  - (iii) central bank instrument independence;
  - (iv) broad domestic consensus on the prominence of the inflation target;
  - (v) some basic understanding of the transmission mechanism, and a reasonable capacity to affect short-term interest rates; and
  - (vi) reasonably well-functioning financial system and markets.
- Transition recommendations (preserved guidance):
  - During transition to FFIT it is essential to:
    - Maintain sound macroeconomic and structural policies to create an environment conducive to IT;
    - Focus on establishing the necessary conditions; and
    - Accelerate efforts to establish the requirements of a more flexible exchange rate regime to avoid abrupt shocks and lack of a feasible monetary anchor.
- Credibility and supply shocks:
  - Well-established policy credibility is essential to cope with unfavorable supply shocks: when expectations are well anchored, increases in inflation have relatively little effect on expectations and minor second-round effects, reducing the need for highly restrictive policy.
  - Lack of credibility requires stronger policy actions and readiness to be more proactive in raising interest rates to visibly reduce inflation.
- Credibility risks and target revisions:
  - IT central banks should avoid revising upward official inflation targets or widening target bands when policy credibility is still low, though lengthening the target horizon can be considered.
  - Any revision to targets or parameters should be clearly communicated and should indicate continued firm focus on controlling inflation in the medium term.
  - To counter perceptions of lack of commitment, the central bank should adopt an ambitious plan to bring inflation back to the revised target.
  - Risks of delayed policy response can be reduced by frequent monitoring and analysis of second-round effects of supply shocks and underlying pressures.
- Complexity of the globalized environment:
  - IT policymakers face multiple simultaneous shocks: commodity market volatility, global financial turmoil, economic slowdown, reversal of capital inflows, and exchange rate depreciation.
  - Central banks must balance inflation-targeting risks against risks of renewed inflation after commodity price reversals; the environment requires credible communication and forward-looking policy responses mindful of probable severe outcomes.

### IX. Selected Country Implementation Profiles (excerpts)
- Canada (February 1991) — implementation profile highlights:
  - Motivation: Difficulties with other nominal anchors; High inflation; Introduction of GST (VAT type tax).
  - Institutional setup at start: Central bank legal independence "Yes, but government directive possible"; Central bank goal independence "Together with government"; Operational independence "Yes"; Legal mandate price stability "Only one part of mandate"; Accountability "No".
  - Institutional capacity: Capacity to affect short-term interest rates "High"; Data availability "High"; Modeling/forecasting capacity "High".
  - Challenges encountered: Data availability "No"; Modeling/forecasting issues "No"; Role of exchange rate "No"; Lack of coordination with economic policies "Fiscal".
  - Partial or full-fledged IT? "FFIT, but Monetary Policy Report introduced only in 1995 (4 years after IT)".
- Poland (June 1998) — implementation chronology and highlights:
  - Preparation staging: 0/1 June 1998–September 1998 (or January 1999); 2 since September 1998 (or January 1999) until April 2000; 3 since April 2000.
  - Support from outsiders: No.
  - Missing elements during partial IT: Not fully floated currency (crawling band system); limited MTM knowledge; limited forecasting capacity; not sufficiently strong fiscal position.
  - Benefits: Completion of disinflation; reinforced central bank credibility; reduced inflation and output volatility; monetary policy more transparent, systematic, informed.
- Romania (August 2005) — initial conditions and challenges:
  - Motivation: Difficulties with other nominal anchors "Yes"; Success of other IT countries "Yes"; EU accession commitments and increasing central bank credibility "Yes".
  - Institutional independence at start: Central bank legal independence "Yes"; Central bank goal independence "Yes"; Operational independence "Yes"; Legal mandate price stability "Yes"; Accountability "No".
  - Institutional capacity: Capacity to affect short-term interest rates "Medium"; Data availability "Medium"; Modeling/forecasting "Medium"; Formal policy decision process "Low".
  - Financial system: Banks’ foreign currency mismatch "High"; Extent of dollarization "High"; Development of government securities market "Low".
  - Challenges: Data availability "Yes"; Modeling/forecasting issues "Yes"; Understanding transmission "Yes"; Role of exchange rate "Yes"; Level of development of financial markets "Yes".
  - Implementation: Preparation period stage "1"; Support from outsiders "Yes"; Partial IT.
  - Benefits: Macro performance "Too early to tell"; Increased monetary policy transparency.
- Turkey (January 2006) — initial conditions and outcomes:
  - Motivation: Difficulties with other nominal anchors "Yes"; Initial conditions (high inflation, economic crisis) "Yes"; Success of other IT countries "Yes"; IT chosen as the only available option.
  - Institutional independence: Central bank legal independence "Yes"; Goal independence "Partial (Targets decided jointly with the government)"; Accountability "Yes".
  - Institutional capacity: Capacity to affect short-term interest rates "High"; Data availability "Medium"; Understanding of transmission "Low"; Modeling/forecasting capacity "Low"; Formal decision process "Low".
  - Financial system: Banking system health "Low"; Extent of dollarization "High"; International financial integration "High".
  - Economic structure: Exchange-rate system code "4"; Initial inflation "80%".
  - Challenges: Data availability "Yes"; Modeling/forecasting "Yes"; Understanding transmission "Yes"; Role of exchange rate "Yes"; Level of development of financial markets "Yes".
  - Implementation: Adopted (1) immediately after the crisis without much preparation; Support from outsiders: "We have benefited from IMF technical assistance."; Partial IT period: "4 years".
  - Benefits: Inflation and output volatility reduced during implicit IT; CB credibility improved; decision making more transparent and systematic; Political support "High on all sides".

*Source: Excerpted material from the IMF working paper content unit labelled "_wp09161 - References.............................................................................................................."*

### References..............................................................................................................

### _wp09161 - References..............................................................................................................

### I. INTRODUCTION
- Summary scope:
  - Presents experiences of selected countries (Canada, Chile, Czech Republic, Hungary, Israel, Poland, Romania, and Turkey) in introducing and implementing inflation targeting (IT).
  - Discusses: (i) motivation for adopting IT; (ii) meeting elements/conditions for IT; (iii) transition to full-fledged IT (FFIT) and coordination with other policies; (iv) benefits from adopting IT; (v) implementation challenges; (vi) lessons from country experiences.
- Time coverage:
  - Synthesis of country experiences until 2007 based on central bank studies; experiences from 2007–2008 based on Habermeier and others (2009).

### II. MOTIVATION FOR ADOPTING INFLATION TARGETING
- Common motivations across sampled countries:
  - Difficulty with other nominal anchors (exchange rate and monetary targeting) in controlling inflation and anchoring expectations.
  - Desire to lower the rate of inflation and anchor inflation expectations via a simple observable target.
  - Experience of success in early IT adopters encouraged adoption in later countries.
- Country-specific drivers (as indicated in Table 1):
  - Canada (1991): Difficulty with other nominal anchors; High inflation; Introduction of a VAT type tax.
  - Chile (1990): Difficulty with other nominal anchors; High inflation.
  - Czech Republic (1998): Difficulty with other nominal anchors; High inflation; Economic crisis; Success of other IT countries; seen as the only option after 1997 crisis.
  - Hungary (2001): Difficulty with other nominal anchors; High inflation; Need for faster progress in reducing inflation.
  - Israel (1992): Difficulty with other nominal anchors; High inflation; used as input to choice of slope for crawling peg regime.
  - Poland (1998): Difficulty with other nominal anchors; High inflation; Heavy capital inflows; enhancing credibility for disinflation.
  - Romania (2005): Difficulty with other nominal anchors; Success of other IT countries; To help meet criteria for ERM II and euro adoption; heavy capital inflows; enhancing credibility.
  - Turkey (2006): Difficulty with other nominal anchors; High inflation; Economic crisis; Success of other IT countries; seen as only option after 2001 crisis; during 2002-05 implicit IT was implemented.
- Notes:
  - In some cases (Israel), IT adoption was used instrumentally (e.g., to choose crawling peg slope) rather than initially for the intrinsic virtues of IT.
  - Canada adopted inflation reduction targets in early 1991 partly in response to the expected inflationary impact of a goods and services tax.

### III. CONDITIONS AT THE TIME OF INTRODUCING INFLATION TARGETING
- Main finding:
  - Countries did not need to satisfy all preconditions at the outset to implement IT successfully; many elements were built gradually after adoption.
- Elements commonly present at IT outset:
  - Price stability as overriding goal (even if other objectives existed).
  - Central bank instrument independence (in practice).
  - Prohibition or limitation of government access to central bank financing (absence of fiscal dominance).
  - Reasonable capacity to affect short-term interest rates.
  - Financial systems and markets sufficiently stable and developed to transmit monetary actions to market rates.
- Elements commonly missing or weak at outset:
  - Modeling/forecasting capacity.
  - Fully developed economic databases.
  - Strong understanding and functioning of the transmission mechanism.
  - Legal/goal independence of the central bank in some cases.
  - Some countries maintained dual nominal anchors (exchange rate plus inflation) and abandoned the exchange rate anchor gradually.
- Table 2 highlights country-level fulfillment of key IT implementation elements:
  - Price stability as primary goal: Romania and Turkey (explicit); Canada, Chile, Czech Republic, Hungary, Israel and Poland (price stability main objective with other goals).
  - Goal independence/agreement on target path: Israel (government set target); Canada, Czech Republic, Hungary, Turkey (joint government–CB); Chile and Poland (CB).
  - Absence of fiscal dominance: Canada, Chile, Czech Republic, Hungary, Israel, Poland, Romania, Turkey.
  - Central bank instrument independence: Canada (de facto), Chile, Czech Republic, Hungary, Israel, Poland, Romania, Turkey.
  - Modeling/forecasting capacity: Canada (well-developed); others little at start, developed over time.
  - Mechanisms of accountability: Canada (informal at outset; formal established over time); Turkey (requirement to inform public about CB operations and when targets were not met).
- Table 3 (preconditions by country) — select highlights preserved verbatim:
  - Canada: Low inflation as one of the monetary policy goals; De facto instrument independence; No fiscal dominance; Effective control over short-term interest rates; Reasonable understanding of transmission mechanism; Well-developed financial markets; Healthy and stable financial system; Informal goal independence; No formal mechanism for accountability initially.
  - Chile: Full independence (goal and instrument); No fiscal dominance; Financial system stability; Reasonable control over short-term interest rates; Presence of a dual anchor (crawling band until 1999); Modeling/forecasting capacity limited; Basic understanding of transmission mechanism.
  - Czech Republic: No fiscal dominance; Instrument independence; Effective monetary policy implementation with key interest rate; Reasonably developed financial markets; Missing: Price stability mandate; Fragile banking system; No experience in forecasting inflation; Little credibility/accountability; No adequate organizational structure; Little political support.
  - Hungary: Price stability as primary goal and CB independence at time of IT introduction; Reasonable financial system stability; Dual anchor (ER band, widened at IT adoption); Modeling/forecasting capacity building gradually; No fiscal rule in place.
  - Israel: No fiscal dominance; Reasonable control over short-term interest rates; Increasing actual CB independence; Well-developed financial markets; Weak legal independence; Presence of dual anchor (crawling band, widened in steps).
  - Poland: Institutional commitment to price stability; No fiscal dominance; Reasonable control over short-term interest rates; Instrument independence; Presence of dual anchor (crawling band, widened in steps after IT adoption and eventually floated); Not very well developed forecasting capacity.
  - Romania: Institutional commitment to price stability; No threat of fiscal dominance; Reasonable control over short-term interest rates; Full operational and institutional independence; Forecasting/modeling capacity development ongoing.
  - Turkey: No fiscal dominance; Institutional commitment to price stability; Price stability primary objective set jointly with government; Instrument independence; Forecasting/modeling capacity development ongoing; Understanding of transmission mechanism improving.

### IV. TRANSITION TO FULL-FLEDGED INFLATION TARGETING
- Definition:
  - Transition begins with announcement of intention to adopt IT and ends when most elements of full-fledged IT (FFIT) are in place; FFIT typically entails a floating exchange rate and abandonment of other nominal anchors.
- Typical paths:
  - Gradual (implicit/partial IT) — maintain some other anchor (e.g., exchange rate) while signaling inflation objectives; build institutional capacity over time.
  - Big-bang — rapid move to formal IT after short preparation; requires intensive capacity building post-adoption.
- No firm conclusion on superior strategy (gradualism vs. rapid adoption); choice reflected starting conditions and urgency.
- Country transition examples and timeline from Table 4 (preserved exactly):
  - Canada — Big-bang approach; Beginning of transition to full-fledged IT: Summer 1990 (when preparations started); Adoption of full-fledged IT (FFIT): February 1991; Period of transition: Very short transition period, with all the work done internally at the central bank, with some exploration of the NZ announcement in 1989. Communication efforts for formal accountability enhanced gradually.
  - Chile — Gradual approach; Beginning of transition: September 1990; Adoption of FFIT: September 1999 (with full peso float); Period of transition: Long transition period to FFIT, with the crawling band abandoned in 1999.
  - Czech Republic — Big-bang approach; Beginning of transition: December 1997; Adoption of FFIT: Early 1998; Period of transition: Very short: adopted after a few months of technical preparations, with further refinements continuing until 2001-02. However, many elements that would facilitate operation of a flexible ER and IT had been put in place over time. Medium term targets adopted from 2002.
  - Hungary — Gradual approach; Beginning of transition: June 2001 (official announcement of a partial IT regime); Adoption of FFIT: February 2008 (with forint’s full float); Period of transition: Gradual transition period to FFIT, with the horizontal exchange rate band in place until Feb 2008, although most other elements of FFIT were in place since [text truncated in source].
- Lessons from transition experiences:
  - Rapid adoption can restore credibility quickly after a crisis but may require intense post-adoption capacity building (e.g., Czech Republic).
  - Gradual adoption allows time to assemble institutional requirements and avoid premature credibility loss when elements are missing (e.g., Turkey, Chile, Hungary, Israel).
  - Abandoning exchange rate anchors typically occurred gradually; FFIT attainment usually coincided with abandonment of exchange rate bands and move to a floating currency.
  - Building capacity for a flexible exchange rate regime (deep FX markets, FX risk management systems, coherent intervention policies, ability to influence short-term interest rates) facilitated operation of IT and was mutually reinforcing with FFIT adoption.

*Source: Excerpt from the IMF working paper content unit labelled "_wp09161 - References.............................................................................................................."*

### 2001. The band was kept in place, with

### _wp09161 - 2001. The band was kept in place, with

### Country transition experiences to inflation targeting (excerpts)
- Israel
  - Approach: Gradual approach
  - Key dates: December 1991; June 1997
  - Notes: Long transition period to FFIT, with sufficient widening of the crawling band and ceasing of FX intervention in June 1997 making policy conflicts less likely. The shekel then floated de facto (with full de jure floating only since mid-2005). Medium term targets adopted since 2000.
- Poland
  - Approach: Relatively rapid and smooth
  - Key dates: June 1998 (announcement of intention to introduce IT); April 2000
  - Notes: Short transition period with further refinements continuing. In March 1999, IT was officially adopted with zloty’s de facto float (full float beginning in April 2000). Medium term targets since October 1999.
- Romania
  - Approach: Gradual approach
  - Key dates: July 2004 (internal IT with shadow forecasts and informal Inflation Reports); August 2005 (partial IT, with ER managed and financial system not fully developed)
  - Notes: Relatively long transition process to FFIT (process not yet complete). Introduction of partial IT was relatively fast, with intensive bilateral/Fund TA assisting preparations.
- Turkey
  - Approach: Gradual approach
  - Key dates: 2002 (implicit IT); January 2006
  - Notes: Long period of implicit IT until a reasonable set of conditions was put in place, so as to avoid credibility loss from a premature adoption of IT. Bilateral/IMF TA supported the process that focused on enhancing technical infrastructure, a more predictable, systematic decision-making process, and communications. Monetary aggregates were used as complementary (though subordinate) anchors.

_Source: National central banks._

### Coordination of supporting reforms/policies with capacity building for IT (figure highlights)
- Figure themes (timeline aspects preserved from source figures):
  - IT capacity; FX market; Capital inflow liberalization; Capital outflow liberalization; Monetary policy operational capacity; Intervention policies; FX risk management and regulation.
  - Exchange rate regimes mentioned in timelines: Crawling Band; Basket Peg w ith +/- 0.5 % Band; +/- 7.5 % Band; Managed Float; Free Float; Horizontal Band; Craw ling Fan (de facto float); Peg USD/Basket.
  - Operational tools and market developments cited at various stages:
    - Implementation of a policy rate; Interbank rate as an operational target; O/N standing facility; Repo operations; Full corridor system introduced; Continuous interbank market; Exchange traded FX options; OTC market for FX options; First interbank broker.
    - Intervention practices including: Central bank intervenes inside the band smoothing the volatility; Intervention strategy a standard instrument; Intervention volumes published; Interventions stopped (formal policy of no intervention); Smoothing operations inside the band.
  - Capital account liberalization milestones referenced:
    - URR and maturity restrictions on inflows abolished; FDI fully liberalized; FDI and bank investment abroad relaxed; Limits to access the FX market eliminated; Long-term inflows liberalized; Short-term inflows liberalized; Most other outflows liberalized; All restrictions on non-residents lifted; Full liberalization.
  - FX risk management and regulation:
    - Banks instructed to consider FX risk of debtors; Tight qualification criteria and provisions; Limits on net open FX positions (NOP) set; FX risk incorporated into capital requirements; Reporting on FX risk policies; Capital charges for FX risk.
  - Market instruments liberalized over time:
    - Forward and swap transactions partially liberalized; Futures transactions of residents permitted; Options to Euro introduced; Swap and NDF markets develop; Derivative transactions further liberalized; Limits on short open positions.
- Country-specific figure fragments included: Chile, The Czech Republic, Israel, Poland (noted as part of figure panels).

### V. Benefits of Inflation Targeting (text excerpts)
- Documented benefits observed in the sample countries:
  - IT contributed to authorities’ efforts to disinflate.
  - Inflation expectations were better anchored and showed some signs of becoming more forward looking.
  - Floating exchange rate regimes accompanying IT resulted in a self-correcting mechanism that became an efficient shock-absorber (examples: Chile, and Poland).
  - There has been some reduction in exchange rate passthrough.
  - Communication and transparency have improved.
  - IT enabled clear institutional assignment of responsibilities for inflation control (example: Poland).
  - IT had a disciplining effect, helping to accelerate the process of building key elements that enhance successful implementation of IT (examples: Czech Republic, Turkey, and Romania).
  - The quality of policy debate has also improved (example: Czech Republic).

- Factors contributing to IT success in these countries:
  - A clear mandate and central bank independence.
  - Commitment to and consensus within the central bank on the importance of IT.
  - Clear communication, political and public support.
  - Forecasting and setting interest rates according to the relationship between forecast inflation and the target.
  - Supportive fiscal and financial policies.
  - A clear analytical basis for monetary decision-making.
  - A good understanding of the transmission mechanism.
  - Effective capacity to implement floating exchange rate regimes.
  - Making use of other country experiences and lessons as a resource to IT central banks.

### VI. Challenges in implementing the inflation targeting framework (beginning)
- Introductory note:
  - IT countries have faced a range of important challenges in introducing and implementing the IT regime, one of the most difficult of which was experienced relatively recently.
- Section heading included: A. Challenges Faced to mid-2007
  - Opening sentence preserved: While not all the so-called preconditions turned out to be needed at the time of IT

*Source: Ötker-Robe and Vávra (2007).*

### introduction, the absence of some of the elements made implementation more challenging.

### _wp09161 - introduction, the absence of some of the elements made implementation more challenging.

### Implementation challenges for inflation targeting (IT)
- Conflict between simultaneous inflation and exchange rate targets complicated monetary policy implementation in Chile, Hungary, and Israel:
  - Interest rates required to hit inflation targets were at times inconsistent with rates needed to keep currencies within exchange rate bands.
  - Sterilization to defend bands was costly and affected central bank profit/loss positions.
  - Even wide bands became binding at times, constraining alignment of monetary conditions with inflation along the disinflation path.
  - Formal or informal elimination of exchange rate targets removed the constraint and enhanced credibility (1999 in Chile, 1997 in Israel, and 2008 in Hungary).
- Difficulties in modeling and forecasting inflation undermined credibility, particularly when:
  - Data series were inadequate.
  - Economies experienced rapid structural shifts.
  - Transmission mechanisms were imperfectly understood (Chile, Czech Republic, Hungary, Israel, Poland, Romania, and Turkey).
  - Food and regulatory prices had a pronounced share in CPI (Poland and Romania).
  - Consequences included excessive tightening, fluctuations in activity, and attacks on central bank independence (Czech Republic).
  - Strong capital inflows increased uncertainty about policy and intervention responses (Hungary, Israel, Romania, and Turkey).
- Lack of full political support and threats to central bank independence:
  - Maintaining political and public support was difficult when tight policies were required (Chile and Czech Republic).
  - Disagreements with government during disinflation strained central banks’ independence (Czech Republic, Israel, Poland, and Turkey).
  - Maintaining internal consensus was sometimes difficult (Czech Republic and Israel).
- Weak fiscal situations raised risk premiums and interest rates:
  - Hungary experienced large-scale shocks mostly of fiscal origin, requiring repeated large-scale monetary tightening and causing high interest rate volatility.
  - In Canada, fiscal issues and political/constitutional difficulties slowed the fall in inflation expectations and kept real interest rates high; real interest rates fell appreciably only after federal budgets of 1995 and 1996 put the fiscal situation on a sustainable path.
  - In Turkey (implicit inflation targeting period of 2002-05), the central bank did not raise interest rates but focused on fiscal reforms and communication to convince the public of improving fundamentals.
- Underdeveloped financial markets limited ability to assess market risk premia (Romania):
  - Infrequent government debt issues, poorly developed derivatives markets, and an illiquid stock exchange impeded reliable assessment of market behavior and expectations.
- Other practical challenges:
  - Widespread backward-looking inflation indexation of prices, wages, and indexed assets slowed disinflation and reduction in inflation expectations (Chile and Israel).
  - Organizational challenges in building appropriate expertise, research capacity, and staff coordination (Czech Republic and Poland).
  - Difficulties choosing target parameters: headline vs. core inflation, target level/range, policy horizon, and speed of disinflation (Poland).
  - Early adopters lacked foreign precedents (Canada, Chile, Israel); lack of adequate preparation time was a challenge where credibility had to be established rapidly (Czech Republic and Turkey).

### Mid-2007 to mid-2008: commodity price shocks and policy responses
- The surge in food and energy prices from mid-2007 to mid-2008 posed a major test of IT credibility in emerging markets; most IT countries overshot official inflation targets.
- None of the IT countries revised their officially-announced inflation targets in response to rising inflation, except Turkey:
  - Turkey revised the target upward in June 2008 for 2009-2011 after extending the target horizon and revising the inflation forecast, aligning targets with rising inflation forecasts.
  - Turkey revised the target from 4% to 7.5%, 6.5%, 5.5% in 2009, 2010, 2011.
- Common policy responses among IT countries:
  - Majority tightened policy rates to anchor expectations, limit second-round effects, and maintain credibility (Chile, Czech Republic, Hungary, Israel, Poland, Romania).
  - Some central banks emphasized that the time to return to target may differ by circumstances.
  - Nominal or real exchange rate appreciation helped limit passthrough of imported inflation in the Czech Republic, Hungary, Israel, and Poland.
  - Some combined higher interest rates with prudential measures (Romania).
  - Tight fiscal stance provided support in Hungary and Poland.
- Selected policy rate changes and actions (as of August 2008), Table 5 highlights:
  - Chile: Yes overshot (Aug 2007); Raised key policy rate (275 bp since Jul 2007).
  - Czech Republic: Yes overshot (Fall 2007); Raised key policy rate (125 bp from Jan 2007); Let exchange rate appreciate; Lowered the key rate 25 bp on August 7, 2008 given strong koruna appreciation and downside inflation risks.
  - Hungary: Yes overshot (Fall 2006); Raised key policy rate (100 bp since Mar 2008); Abandoned the band (Feb 2008) and let the forint float; Tight fiscal policy.
  - Israel: Yes overshot (End 2007); Raised key policy rate (75 bp since May 2008); Let exchange rate appreciate.
  - Poland: Yes overshot (End 2007); Raised key policy rate (200 bp since Apr 2007); Let exchange rate appreciate; Tight fiscal policy.
  - Romania: Yes overshot (Fall 2007); Raised key policy rate (325 bp since Oct 2007); Prudential measures for credit.
  - Turkey: Yes overshot (Fall 2007); Raised key policy rate (150 bp since Apr 2008); Revised the target from 4% to 7.5%, 6.5%, 5.5% in 2009, 2010, 2011.
- Inflation dynamics and expectations:
  - Headline inflation pressures began to ease around mid-2008 due to declining commodity prices and growing indications of a global slowdown.
  - Quick reduction in inflation was hindered by second-round effects and policy transmission lags; markets often viewed actions as too little and too late.
  - IT countries continued to exceed mid-points or upper bands of official targets; inflation expectations remained elevated in most countries for 2008.
  - The rise in inflation expectations was greater where real policy rates declined the most.
  - Inflation expectations were relatively well contained in some countries (Czech Republic, Hungary, Israel, and Poland) and had come down for 2009 from 2008 levels for many countries despite overshooting.

### Lessons from country experiences (VII)
- General conclusions:
  - A number of conditions are necessary for successful implementation of FFIT, but absence of some conditions should not discourage transition toward IT; premature announcement of IT before a minimum set of conditions are in place should be avoided.
  - There is no single most effective path to adopt IT; many successful IT countries lacked some conditions at the outset and worked to establish them over time and by learning-by-doing. Central banks must initiate and actively work with governments to establish conditions.
  - Adoption of IT tends to promote development of supporting elements; establishing some elements can be mutually reinforcing and accelerate progress toward full-fledged IT.
- Essential elements that made IT more feasible (listed in source):
  - (i) price stability as the overriding monetary policy goal;
  - (ii) absence of fiscal dominance;
  - (iii) central bank instrument independence;
  - (iv) broad domestic consensus on the prominence of the inflation target;
  - (v) some basic understanding of the transmission mechanism, and a reasonable capacity to affect short-term interest rates; and
  - (vi) reasonably well-functioning financial system and markets.
- Transition recommendations:
  - During transition to FFIT it is essential to:
    - Maintain sound macroeconomic and structural policies to create an environment conducive to IT;
    - Focus on establishing the necessary conditions; and
    - Accelerate efforts to establish the requirements of a more flexible exchange rate regime to avoid abrupt shocks and lack of a feasible monetary anchor.
- Credibility and supply shocks:
  - Well-established policy credibility is essential to cope with unfavorable supply shocks: when expectations are well anchored, increases in inflation have relatively little effect on expectations and minor second-round effects, reducing the need for highly restrictive policy.
  - Lack of credibility requires stronger policy actions and readiness to be more proactive in raising interest rates to visibly reduce inflation.
- Credibility risks and target revisions:
  - IT central banks should avoid revising upward official inflation targets or widening target bands when policy credibility is still low, though lengthening the target horizon can be considered.
  - Any revision to targets or parameters should be clearly communicated and should indicate continued firm focus on controlling inflation in the medium term.
  - To counter perceptions of lack of commitment, the central bank should adopt an ambitious plan to bring inflation back to the revised target.
  - Risks of delayed policy response can be reduced by frequent monitoring and analysis of second-round effects of supply shocks and underlying pressures.
- Complexity of the globalized environment:
  - IT policymakers face multiple simultaneous shocks: commodity market volatility, global financial turmoil, economic slowdown, reversal of capital inflows, and exchange rate depreciation.
  - Central banks must balance inflation-targeting risks against risks of renewed inflation after commodity price reversals; the environment requires credible communication and forward-looking policy responses mindful of probable severe outcomes.

*Source: Excerpt from _wp09161 - introduction, the absence of some of the elements made implementation more challenging.*

### Appendix I. Background and Brief Summary of the Book On Implementing Full-Fledged

### Appendix I. Background and Brief Summary of the Book On Implementing Full-Fledged Inflation Targeting Regimes: Saying What You Do and Doing What you Say

### Background information
- The book grew out of a series of inflation-targeting (IT) and macro-modeling workshops designed to introduce central bankers and IMF staff members to IT and macro-modeling practical aspects.
- External workshops (regional) locations and years: Mexico (2001), Finland (2001), Turkey (2002), Finland (2003), Ukraine (2004), Turkey (2005), Thailand (2006), Morocco (2007).
- Internal workshops were organized by the IMF Institute each year since 2006.
- External workshops were sponsored in part by the host central bank and organized by staff in the Fund’s Research Department and Monetary and Capital Markets Department.
- Contributors from IT central banks and IMF staff explicitly acknowledged include: Tore Anders Husebø (formerly Norges Bank), Jaromir Benes (formerly Czech National Bank and Reserve Bank of New Zealand and currently IMF), Aaron Drew (Reserve Bank of New Zealand), David Hargreaves (Reserve Bank of New Zealand), Jaromir Hurnik (Czech National Bank), Ondra Kamenik (Czech National Bank and IMF), Tiff Macklem (formerly Bank of Canada), Øistein Røisland (Norges Bank), David Rose (formerly Bank of Canada), Alasdair Scott (formerly Reserve Bank of New Zealand and Bank of England, currently IMF), Kristen Solberg-Johansen (Norges Bank), David Vávra (formerly Czech National Bank, currently IMF), Jan Vlcek (Czech National Bank), Andy Berg, Philippe Karam, Michael Kumhof and Papa N’Diaye (IMF).

### Brief summary of the chapters
- Chapter 2. Why Inflation Targeting? Freedman and Laxton (2009a):
  - Background considerations on why central banks have chosen low inflation as their policy goal and why many countries have chosen inflation targeting.
- Chapter 3. Inflation Targeting Parameters: Freedman and Laxton (2009b):
  - Discusses design parameters: (i) the definition of target variable; (ii) the potential role of core inflation measures; (iii) the advantages and disadvantages of point targets, point targets with a band, and range targets; (iv) the choice of the long-run target inflation rate; (v) the target horizon; and (vi) the loss function and policy horizon.
- Chapter 4. Transparency and Accountability: Freedman (2009):
  - Discusses issues related to transparency, communications, and accountability.
- Chapter 5. Important Elements for Emerging Economies: Freedman and Ötker-Robe (2009a):
  - Discusses important elements in implementing an IT framework in emerging economies.
- Chapter 6. Role of the Exchange Rate: Freedman, Laxton and Ötker-Robe (2009):
  - Discusses the role of the exchange rate in an IT regime.
- Chapter 7. Forecasting and Policy Analysis System: Laxton, Rose and Scott (2009):
  - Sets out the process for developing a structured forecasting and policy analysis system.
- Chapter 8. Research and Advanced Macro Modeling: Laxton, Rose and Schmidt-Hebbel (2009):
  - Examines the role of research and DSGE modeling under IT.
- Chapter 9. Modeling at the Central Bank of Chile: Schmidt-Hebbel (2009):
  - Discusses experiences with modeling at the central bank of Chile.
- Chapter 10. Country Experiences with the Introduction and Implementation of Inflation Targeting: Freedman and Ötker-Robe (2009b):
  - Presents selected country experiences with IT, including a summary of lessons learned from country experiences based on detailed case studies prepared by national central bank representatives.

### Appendix II / Selected empirical findings from Tables (Degree of preparedness and transition)
- Table 6. Degree of Preparedness in Introducing Inflation Targeting — selected country indicators preserved exactly as in source:
  - Institutional independence (examples):
    - Canada (Feb 1991): Central bank legal independence: "Yes, but gov. directive possible".
    - Czech R (Early 1998): "Yes".
    - Hungary (Jun 2001): "Yes".
    - Israel (1992): "Partial".
    - Poland (Jun 1998): "Yes".
    - Romania (Aug 2005): "Yes".
    - Turkey (Jan 2006): "Yes".
  - Central bank goal independence examples:
    - Canada: "With gov."
    - Czech R: "Yes"
    - Hungary: "Yes"
    - Israel: "No"
    - Poland: "Yes"
    - Romania: "Yes"
    - Turkey: "Partial (targets decided jointly with the gov.)"
  - Institutional capacity and technical infrastructure (selected entries):
    - Capacity to affect short-term interest rates: Canada "High"; Czech R "High"; Hungary "High"; Israel "High"; Poland "High (interbank mkt), medium (retail mkt)—weak transmission"; Romania "Medium"; Turkey "High".
    - Data availability: Canada "High"; Czech R "Low"; Hungary "Medium"; Israel "High"; Poland "Low"; Romania "Medium"; Turkey "Medium".
    - Extent of modeling/forecasting capacity: Canada "High"; Czech R "Low"; Hungary "Medium"; Israel "Low"; Poland "Medium"; Romania "Medium"; Turkey "Low".
  - Financial system health and development (selected entries):
    - Banking system health and regulation: Canada "High (some loan losses)"; Czech R "Medium"; Hungary "High"; Israel "Medium"; Poland "High"; Romania "Medium"; Turkey "Low".
    - Extent of dollarization: Canada "Low"; Czech R "Low"; Hungary "Low"; Israel "Low"; Poland "(high CPI indexation)"; Romania "Medium: FX loans Low: deposits"; Turkey "High".
    - International financial integration: Canada "High"; Czech R "High"; Hungary "High"; Israel "Low"; Poland "Medium"; Romania "High"; Turkey "High".
  - Economic structure and exchange-rate system (selected entries):
    - Exchange-rate system codes (1=Free float; 2=Managed float; 3=Crawling band; 4=Crawling peg; 5=Horizontal band; 6=Fixed peg; 7=Other (hard peg)):
      - Canada: "1; 2"
      - Czech R: "2"
      - Hungary: "4; then 5"
      - Israel: "5, then 3"
      - Poland: "3; 1 since April 2000"
      - Romania: "2"
      - Turkey: "4"
    - Monetary policy framework before IT:
      - Canada: "2 (1975-82); no anchor (1982-91)"
      - Czech R: "1,2"
      - Hungary: "1"
      - Israel: "1"
      - Poland: "1+2"
      - Romania: "1 (de facto)/ 2 (de jure)"
      - Turkey: "1"
    - Initial inflation examples:
      - Canada: "High (Canadian standards)"
      - Czech R: "13.1%"
      - Hungary: "10%"
      - Israel: "High"
      - Poland: "12.2% (Jul 98—start of trans. per.; 6.9% in Jan 99–official adoption)"
      - Romania: "Medium"
      - Turkey: "80%"
  - Functioning of transmission mechanisms (worse than standard industrial countries?) — Canada: "At least as good"; others mostly "Worse".
  - Political conditions — Political support of IT:
    - Canada: "High within CB and gov.; Low by opposition parties"
    - Czech R: "Medium. Internally rising, but fell externally after the initial period of recession."
    - Hungary: "High within CB; Medium within gov."
    - Israel: "Medium"
    - Poland: "Yes"
    - Romania: "Medium"
    - Turkey: "Both high within the CB and gov."

- Table 7. Transition to Full-Fledged Inflation Targeting and Challenges Experienced in Implementation — selected country-level entries preserved exactly:
  - Data availability challenges encountered (Yes/No): Canada "No"; Czech R "Yes"; Hungary "Yes"; Israel "No"; Poland "Yes"; Romania "Yes"; Turkey "Yes".
  - Modeling, forecasting, forecast process issues: Canada "No"; Czech R "Yes"; Hungary "Yes"; Israel "No"; Poland "Yes"; Romania "Yes"; Turkey "Yes".
  - Understanding and modeling the transmission: Canada "No"; Czech R "Yes"; Hungary "Yes"; Israel "No"; Poland "Yes"; Romania "Yes"; Turkey "Yes".
  - Role of the exchange rate mechanism as an implementation challenge: Canada "No"; Czech R "Yes"; Hungary "Yes"; Israel "Yes"; Poland "No"; Romania "Yes"; Turkey "Yes".
  - Lack of coordination with other economic policies — fiscal coordination indicated as a challenge in multiple cases (e.g., Czech R "Fiscal", Hungary "Yes", Israel "Yes", Poland "Yes", Romania "Yes", Turkey "No").
  - Which FFIT elements were missing during the partial IT period? (excerpts):
    - Czech R: "Full understanding and use of monetary transmission for decision making; full forecasting capacity; lack of coordination with gov. in setting targets; effective communication strategy."
    - Hungary: "Full exchange rate flexibility"
    - Israel: "Political support; broad consensus among officials; flexible exchange rate"
    - Poland: "Fully flexible exchange rate; limited knowledge of the transmission mech.; modeling/ forecasting capacity; insufficiently strong fiscal position"
    - Romania: "Freely floating currency"
    - Turkey: "Debt sustainability and financial depth; fully functioning monetary transmission; internal CB organization and forecasting capacity; communication strategy."
  - Buildup of FFIT elements over time:
    - Communication strategy developed over time (Canada).
    - Czech R: "Gradual, in general lagging behind the regime itself."
    - Hungary: "Full forecasting capacity, systematic internal processes"
    - Israel: "Gradual"
    - Poland: "Adopted relatively fast; but building all preconditions was gradual."
    - Romania: "Gradual"
    - Turkey: "Gradual"
  - Duration of IT regime stages (legend): "0 = Internal IT, 1= Implicit IT, 2= Official IT - Partial; 3= Official IT-Full-fledged."
    - Example entries:
      - Canada: "0 = 6 to 8 months; 3 thereafter."
      - Czech R: "6 months to reach 2, when IT was introduced formally. 2 years to reach 3, when medium term inflation target was introduced"
      - Hungary: "2 – exchange rate band, though wide (±15%), was a constraint on IT"
      - Israel: "0/1 (all elements of implicit IT w/o medium-term target Jun 1998 to Jan 1999 when IT was officially adopted 2 – from Jan 1999 (official adoption until Apr 2000; 3 – since April 2000, after zloty’s float"
      - Poland: "1 adopted right after the crisis without much preparation."
      - Romania: "4 years"
      - Turkey: (various entries indicating partial IT)
  - Support from outsiders: Mixed—some countries report "Yes" (e.g., Czech R, Poland) while others report "No" (e.g., Canada, Hungary, Israel).

### Canada (February 1991) — distilled implementation profile and challenges
- Motivation for IT:
  - Difficulties with other nominal anchors: "Yes"
  - Initial conditions: "High inflation"
  - Success of other IT countries: "No"
  - Other driver: "Introduction of GST (VAT type tax)"
- Institutional setup at start of IT (preserved verbatim):
  - Fiscal obligation: "No"
  - Central bank legal independence: "Yes, but with government directive possible"
  - Central bank goal independence: "Together with government"
  - Central bank operational/instrument independence: "Yes"
  - Central bank legal mandate price stability: "Only one part of mandate"
  - Central bank accountability: "No"
- Institutional capacity and technical infrastructure (Canada):
  - Capacity to affect short-term interest rates: "High"
  - Capacity to conduct open-market operations: "High"
  - Data availability: "High"
  - Understanding of monetary policy transmission mechanisms: "Medium/high"
  - Extent of modeling/forecasting capacity: "High"
  - Formal process of monetary policy decision making: "High"
- Financial system development (Canada):
  - Banking system health and regulation: "High (although some bank loan losses)"
  - Money and foreign exchange market development and depth: "High"
  - Banks’ foreign currency mismatch: "Low"
  - Extent of dollarization: "Low"
  - Development of government securities market: "High"
  - International financial integration: "High"
- Economic structure (Canada):
  - Exchange-rate system: "1 / 2"
  - Monetary policy framework before IT: "1975 to 1982: 2; 1982 to 1991: no anchor"
  - Exchange-rate passthrough: "Medium"
  - Fiscal policy: "Public deficit and debt high; no fiscal rules although strong commitment to avoiding deficits since latter part of 1990s"
  - Initial inflation: "High by Canadian standards"
  - Functioning of transmission mechanisms: "As good as or better than most countries"
- Political conditions: Political support of IT "High in central bank and government; opposed by opposition parties"
- Challenges encountered during introduction/implementation (Canada):
  - Data availability: "No"
  - Modeling, forecasting, forecast process issues: "No"
  - Understanding and modeling the transmission: "No"
  - Role of the exchange rate mechanism: "No"
  - Legal challenges: "No"
  - Lack of coordination with economic policies/reforms: "Fiscal"
  - Level of development of financial markets: "No"
  - Banking sector financial condition: "No"
  - Establishing capacity to affect interest rates: "No"
  - Maintaining/gaining central bank independence: "No"
- Implementation notes:
  - Duration of IT regime stages — legend and Canada entry: "0 = Internal IT, 1= Implicit IT, 2= Official IT - Partial; 3= Official IT-Full-fledged" and "0 = 6 to 8 months; 1= an; 2 = an."
  - Support from outsiders (IMF, consultants, other CBs): "No"
  - Partial or full-fledged IT? "FFIT, but Monetary Policy Report introduced only in 1995 (4 years after IT)"
  - Which FFIT elements were missing during partial IT period? "Na"
  - Buildup of FFIT elements over time: "Communications developed over time"

*Source: Appendix I and related tables from _wp09161 - Appendix I. Background and Brief Summary of the Book On Implementing Full-Fledged Inflation Targeting Regimes: Saying What You Do and Doing What you Say*

### 5.  Benefits from adopting inflation targeting (list)

### _wp09161 - 5.  Benefits from adopting inflation targeting (list)

### Overview (general list at start of section)
- Benefits in macroeconomic performance (inflation, target accuracy, inflation and output volatility, anchoring of inflation expectations, credibility, etc.)
  - All, but appreciable lag until real interest rates came down
- Benefits in the conduct of monetary policy (e.g., more transparent/systematic/informed implementation)
  - All
- Political support/consensus for IT and monetary pol. (gov., markets, academics) (Yes/No)
  - Yes, gradually over time
- Which particular initial conditions contributed to the latter benefits?
  - Success in achieving the target, and improvement in communications

### Czech Republic (early 1998) — Benefits from adopting IT
- Benefits in macroeconomic performance
  - Inflation has permanently fallen to average EMU levels, but remains very volatile, and so does output.
  - Despite the poor track record in meeting the targets, the Bank’s credibility has increased substantially and survey expectations are very well anchored on the target even in the face of major shocks and deviations from the target.
- Benefits in the conduct of monetary policy
  - Much more transparent, more systematic, more informed monetary policy implementation.
- Political support/consensus for IT and monetary policy (gov., markets, academics) (Yes/No)
  - Yes. But the support was low in the early phase, when too restrictive monetary policy contributed to a substantial recession and targets were repeatedly undershot.
- Which particular initial conditions contributed to the latter benefits?
  - Central Bank independence

### Hungary (June 2001) — Benefits from adopting IT
- Benefits in macroeconomic performance
  - Inflation declined: stable low inflation environment reached; credibility gains.
- Benefits in the conduct of monetary policy
  - Much more transparent and systematic.
- Political support/consensus for IT and monetary policy (gov., markets, academics) (Yes/No)
  - Markets and academics: YES
  - Gov: supports IT, but sometimes disagrees on monetary policy stance.
- Which particular initial conditions contributed to the latter benefits?
  - Established institutional prestige during crawling peg regime

### Israel (1992) — Benefits from adopting IT
- Benefits in macroeconomic performance
  - Greatly improved financial & overall macro stability, anchoring expectations, and confidence of foreign investors.
- Benefits in the conduct of monetary policy
  - All of the factors mentioned (more transparent/systematic/informed implementation).
- Political support/consensus for IT and monetary policy (gov., markets, academics) (Yes/No)
  - Yes so far
- Which particular initial conditions contributed to the latter benefits?
  - (No specific initial condition listed in the source for this item.)

### Poland (June 1998) — Benefits from adopting IT
- (The source text for Poland in this section ends at challenges; explicit bulleted “Benefits from adopting inflation targeting” for Poland is not provided in the supplied content.) 

*Source: _wp09161 - 5.  Benefits from adopting inflation targeting (list)*

### 4.  Implementation of IT

### 4.  Implementation of IT

### Preparation period and transition staging (definitions and timing)
- Preparation period—duration of the transition period to introduce a form of IT (0 = Internal IT; 1= Implicit IT; 2= Partial IT; 3= Full-fledged IT) 1/
- Definitions of stages 0–3 reproduced exactly as in source:
  - 0 = Internal IT is a period, when the authorities have decided to move into IT some time in the future and started to prepare for implementing some IT compatible conditions, without declaring quantitative inflation targets to the public.
  - 1 = Implicit IT is a period when the country has announced medium term inflation targets to the public, but not the regime and its details as such. It involves a country acting as if IT were in place without a formal adoption of the regime. Typically the central bank would also have other intermediate targets (e.g., exchange rate, or monetary).
  - 2 = Partial IT is a period after the authorities have declared IT regime officially by (i) giving priority to achieving low and stable inflation over other monetary policy goals, (ii) announcing a trajectory of quantitative inflation targets, and (iii) disclosing details of the regime to public. Some of the other key elements of IT may be missing. A typical example of partial IT involves maintaining some form of exchange rate target (including within a wide band), while low and stable inflation is the final objective of monetary policy.
  - 3 = Full Fledged IT (FFIT) is a period after the country has additionally satisfied the following (not entirely objective) criteria: (i) announced medium term inflation targets, (ii) a floating exchange rate, with inflation as the only intermediate target (i.e., no exchange rate targets with or without bands), (iii) absence of fiscal dominance, iv) central bank instrument independence, v) reasonably good forecasting capacity (covering the period of medium term inflation targets), and (vi) intensive communication efforts making policies accountable and transparent to build up credibility.
- Note on sequencing: stages 0 and 1 often coincide; sometimes the country starts from 2 straightaway. Identification of stages 0 and 3 is necessarily subjective.

### Poland (June 1998) — implementation chronology and characteristics
- Preparation period / staging (reported values and dates):
  - 0/1  (all elements of implicit IT but lacking medium-term target) June 1998–September 1998 (or January 1999, when IT was officially implemented );
  - 2 – since September 1998 (when details of the IT framework were published in the Medium-Term Strategy of Monetary Policy) or January 1999 (official implementation of IT) until April 2000;
  - 3 – since April 2000, i.e., after full floating of the zloty exchange rate
- Support from outsiders (IMF, consultants, other CBs): No (There was not any bilateral assistance from any of the CBs in the region in the process of preparation/implementation; further exchange of views, including IMF missions, were conducive to refinements of the already-formulated IT framework)
- Partial or full-fledged IT? Partial IT from June 1998 (officially IT was implemented in January 1999) until April 2000 (full floating of the zloty)
- Which elements were missing and why during partial IT period? (list)
  - Not fully floated currency (crawling band system);
  - limited knowledge about the MTM, largely due to problems with data availability (short time series);
  - Related to that and short modeling experience was not well developed ability to forecast inflation;
  - not sufficiently strong fiscal position;
- Buildup of conditions over time (quick or gradual establishment?)
  - Based on the Schaechter et al. (2000) definition of the adoption of full-fledged IT, Poland’s transition to this system was fast, i.e., the necessary conditions were created quickly as compared with, e.g., Chile or Israel;
  - On the other hand, it was a rather smooth and gradual process when set against the Czech experience (where IT adoption was the direct outcome of the 1997 currency crisis);
  - However, when adopting a more strict definition of full-fledged IT, consistent with meeting (almost) all foundations for successful, full-fledged IT, the establishment of these conditions in Poland was gradual (e.g., the first inflation projection was published only in August 2004 Inflation Report).

### Poland — benefits from adopting inflation targeting
- Benefits in macroeconomic performance:
  - Completion of disinflation—shift from disinflation path to the continuous target;
  - it reinforced the central bank credibility;
  - despite poor record of meeting short-term inflation targets, successful fulfillment of the medium-term target;
  - reduced inflation and output volatility;
  - reduced inflation expectations, though mostly due to the decline in the current inflation level (inflation expectations are still largely adaptive)
- Benefits in the conduct of monetary policy:
  - More transparent, more systematic, more informed implementation
- Political support/consensus for IT and monetary policy (Yes/No): Yes, but still questioned
- Which particular initial conditions contributed to the latter benefits?
  - Central bank independence (during the disinflation period, on some occasions the political pressure was exerted on the central bank—without the price stability legal mandate and independence guaranteed by the Constitution, the central bank might have not been able to withstand the political pressure).

### Romania (August 2005) — motivations and initial conditions
- Motivation for IT (yes/no):
  - Difficulties with other nominal anchors: Yes
  - Initial conditions (high inflation, economic crisis): No
  - Success of other IT countries: Yes
  - Others (please specify): Yes (Meeting EU accession commitments, increasing central bank credibility)
- Initial conditions at the start of IT
  - 2.1 Institutional independence (yes/no)
    - Fiscal obligation: No
    - Central bank legal independence: Yes
    - Central bank goal independence (monetary policy obi. determined by the CB): Yes
    - Central bank operational/instrument independence: Yes
    - Central bank legal mandate price stability: Yes
    - Central bank accountability (e.g., has to write a letter of explanation?): No
  - 2.2 Institutional capacity and technical infrastructure (High/Medium/Low)
    - Capacity to affect short-term interest rates: Medium
    - Capacity to conduct open-market operations: High
    - Data availability: Medium
    - Understanding of monetary policy transmission mechanisms: Medium
    - Extent of modeling/forecasting capacity: Medium
    - Formal process of monetary policy decision making: Low
  - 2.3 Financial system health and development (High/Medium/Low)
    - Banking system health and regulation (crisis or not; bank regulatory capital): Medium
    - Money and foreign exchange market development and depth: Low/ Medium
    - Banks’ foreign currency mismatch: High
    - Extent of dollarization (currency substitution, financial dollarization): High
    - Development of government securities market: Low
    - International financial integration (openness of the capital account): High
  - 2.4 Economic structure
    - Exchange-rate system (1=Free float; 2=Managed float; 3= Crawling band; 4=Crawling peg; 5= Horizontal band; 6= Fixed peg; 7= Other (hard pegs)): 2
    - Monetary policy framework before IT (1=Exchange rate anchor; 2=Monetary Targeting): 1(de facto)/2(de jure)
    - Exchange-rate passthrough (High/Medium/Low): Medium
    - Fiscal policy (fiscal rules, public deficit, public debt) (High/Medium/Low): Low/Low/Low
    - Initial inflation: Medium
    - Functioning of transmission mechanisms (worse than standard (industrial countries))?: Yes
  - 2.5 Political conditions
    - Political support of IT (or lack thereof) within CB and government: Medium

### Romania — challenges, implementation, and benefits
- Challenges in introducing/implementing IT (Yes/No)
  - Data availability: Yes
  - Modeling, forecasting, forecast process issues: Yes
  - Understanding and modeling the transmission: Yes
  - Role of the exchange rate mechanism: Yes
  - Legal challenges: No
  - Lack of coordination with economic policies/reforms: No
  - Level of development of financial markets: Yes
  - Banking sector financial condition: No
  - Establishing capacity to affect interest rates: Yes
  - Maintaining/gaining central bank independence: No
- Implementation of IT
  - Preparation period—duration of the transition period to introduce a form of IT (1= Implicit IT; 2= Partial IT; 3= Full-fledged IT) 1/: 1
  - Support from outsiders (IMF, consultants, other CBs): Yes
  - Partial or full-fledged IT? If so, duration of partial IT period: Partial (Not specified duration of managed float)
  - Which elements were missing and why during partial IT period? (list): free float—high appreciation and rising dollarization
  - Buildup of conditions over time (quick or gradual establishment?): Gradual
- Benefits from adopting inflation targeting
  - Benefits in macroeconomic performance: Too early to tell
  - Benefits in the conduct of monetary policy: Increased monetary policy transparency
  - Political support/consensus for IT and monetary policy (Yes/No): Yes
  - Which particular initial conditions contributed to the latter benefits? (not specified in source)

### Turkey (January 2006) — motivations and initial conditions
- Motivation for IT (yes/no)
  - Difficulties with other nominal anchors: Yes
  - Initial conditions (high inflation, economic crisis): Yes
  - Success of other IT countries: Yes
  - Others (please specify): IT was chosen as the only available option at the time, not as a best available regime
- Initial conditions at the start of IT
  - 2.1 Institutional independence (yes/no)
    - Fiscal obligation: No
    - Central bank legal independence: Yes
    - Central bank goal independence (monetary policy obi. determined by the CB): Partial (Targets decided jointly with the government)
    - Central bank operational/instrument independence: Yes
    - Central bank legal mandate price stability: Yes
    - Central bank accountability (e.g., has to write a letter of explanation?): Yes
  - 2.2 Institutional capacity and technical infrastructure (High/Medium/Low)
    - Capacity to affect short-term interest rates: High
    - Capacity to conduct open-market operations: High
    - Data availability: Medium
    - Understanding of monetary policy transmission mechanisms: Low
    - Extent of modeling/forecasting capacity: Low
    - Formal process of monetary policy decision making: Low
  - 2.3 Financial system health and development (High/Medium/Low)
    - Banking system health and regulation (crisis or not; bank regulatory capital): Low
    - Money and foreign exchange market development and depth: Medium
    - Banks’ foreign currency mismatch: Medium
    - Extent of dollarization (currency substitution, financial dollarization): High
    - Development of government securities market: Medium
    - International financial integration (openness of the capital account): High
  - 2.4 Economic structure
    - Exchange-rate system (1=Free float; 2=Managed float; 3= Crawling band; 4=Crawling peg; 5= Horizontal band; 6= Fixed peg; 7= Other (hard pegs)): 4
    - Monetary policy framework before IT (1=Exchange rate anchor; 2=Monetary Targeting): 1
    - Exchange-rate passthrough (High/Medium/Low): High
    - Fiscal policy (fiscal rules, public deficit, public debt) (High/Medium/Low): High
    - Initial inflation: 80%
    - Functioning of transmission mechanisms (worse than standard (industrial countries))?: Worse
  - 2.5 Political conditions
    - Political support of IT (or lack thereof) within CB and government: Both high within the CB and gov.

### Turkey — challenges, implementation, and benefits
- Challenges in introducing/implementing IT (Yes/No)
  - Data availability: Yes
  - Modeling, forecasting, forecast process issues: Yes
  - Understanding and modeling the transmission: Yes
  - Role of the exchange rate mechanism: Yes
  - Legal challenges: No
  - Lack of coordination with economic policies/reforms: No
  - Level of development of financial markets: Yes
  - Banking sector financial condition: No
  - Establishing capacity to affect interest rates: No
  - Maintaining/gaining central bank independence: No
- Implementation of IT
  - Preparation period—duration of the transition period to introduce a form of IT (1= Implicit IT; 2= Partial IT; 3= Full-fledged IT) 1/: We have adopted (1) immediately after the crisis without much preparation
  - Support from outsiders (IMF, consultants, other CBs): We have benefited from IMF technical assistance.
  - Partial or full-fledged IT? If so, duration of partial IT period: 4 years
  - Which elements were missing and why during partial IT period? (list)
    - Debt sustainability and financial depth were not at acceptable levels.
    - MTM was highly uncertain.
    - Internal organization of the Bank did not adapt to the new regime quickly.
    - Initial forecasting capacity was low.
    - Only gradual implementation of public communication strategy.
  - Buildup of conditions over time (quick or gradual establishment?): Gradual
- Benefits from adopting inflation targeting
  - Benefits in macroeconomic performance:
    - During the implicit IT period, inflation and output volatility have been reduced substantially,
    - CB credibility improved extensively due to falling inflation and the new CB law.
    - Accordingly, expectations were largely aligned with the targets in the past 2 years.
  - Benefits in the conduct of monetary policy:
    - Decision making process became more transparent and systematic
  - Political support/consensus for IT and monetary policy (Yes/No): High on all sides
  - Which particular initial conditions contributed to the latter benefits?
    - Central bank independence and fiscal discipline

*Source: 4. Implementation of IT (excerpts reproduced from _wp09161 - 4.  Implementation of IT).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp09161.pdf_