IMF Working Papers

What Measure of Inflation Should a Developing Country Central Bank Target?

By Rahul Anand, Eswar S Prasad, Boyang Zhang

September 23, 2015

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Rahul Anand, Eswar S Prasad, and Boyang Zhang. What Measure of Inflation Should a Developing Country Central Bank Target?, (USA: International Monetary Fund, 2015) accessed July 12, 2025
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

In closed or open economy models with complete markets, targeting core inflation enables monetary policy to maximize welfare by replicating the flexible price equilibrium. We analyze this result in the context of developing economies, where a large proportion of households are credit constrained and the share of food expenditures in total consumption expenditures is high. We develop an open economy model with incomplete financial markets to show that headline inflation targeting improves welfare outcomes. We also compute the optimal price index, which includes a positive weight on food prices but, unlike headline inflation, assigns zero weight to import prices.

Subject: Consumption, Inflation, Inflation targeting, Monetary policy, National accounts, Price indexes, Prices, Sticky prices

Keywords: Africa, Consumption, Core inflation, Core inflation inflation targeting, Financial frictions, Food price inflation, Global, Headline inflation, Headline inflation inflation targeting, Headline inflation targeting regime result, Headline inflation targeting rule, Inflation, Inflation expectation, Inflation targeting, Monetary policy framework, Optimal price index, Price indexes, Sticky prices, Subsistence level, WP

Publication Details

  • Pages:

    37

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2015/205

  • Stock No:

    WPIEA2015205

  • ISBN:

    9781513572574

  • ISSN:

    1018-5941

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