{
  "title": "Perspectives and Lessons from Country Experiences with Inflation Targeting, Remarks at a Panel on Inflation Targeting, by Mr. Murilo Portugal, Deputy Managing Director, IMF",
  "publication": "IMF News, May 17, 2007",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sp051707",
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  "summary": "Remarks delivered at a panel on inflation targeting, employment creation, and economic development.",
  "authors": [
    "Murilo Portugal Deputy Managing Director"
  ],
  "publishDate": "2007-05-17",
  "sections": [
    {
      "heading": "Overview and purpose",
      "content": "- Remarks delivered at a panel on inflation targeting, employment creation, and economic development.\n- Focus: address whether inflation targeting is compatible with growth, employment, and poverty reduction; how it can be adapted to take account of employment, competitiveness, and growth; and whether reasonable alternatives exist given increased international integration.\n- Empirical base: experience of inflation targeting in emerging market economies over the prior decade."
    },
    {
      "heading": "Spread of inflation targeting",
      "content": "- First adopted by New Zealand in 1990.\n- Adopted by 24 countries, of which 16 are emerging market and developing economies.\n- Expectation: more emerging market and developing countries likely to move to inflation targeting within the next 10 years.\n- Four main factors driving adoption:\n  - High and unpredictable inflation in the 1970s and 1980s undermined sustainable growth, external competitiveness, and employment.\n  - Financial innovation weakened the reliability of money and credit aggregates as intermediate targets.\n  - Greater international integration (goods and financial markets) made flexible exchange rates and a new nominal anchor more attractive.\n  - Perceived success in industrial countries: credibility, flexibility, better inflation and growth performance, and resilience to shocks, aided by policy transparency."
    },
    {
      "heading": "Empirical experience in emerging market and developing economies",
      "content": "- Comparison of periods: most emerging market and developing countries performed much better in growth and inflation since 2000 than during the 1990s.\n- Inflation reductions: inflation targeters typically cut inflation from over 10 percent per annum to around 4 percent—roughly twice the reduction achieved by non-inflation targeters.\n- Growth: both targeters and non-targeters enjoyed increases in real GDP growth rates, typically around 2/3 of a percentage point; differences in growth between groups were not statistically significant.\n- Targeting practice:\n  - Neither industrial nor emerging market inflation targeters pursue strict short-term-only inflation targeting.\n  - Inflation targeters miss their targets far more often—around one-third of the time—and for long enough that strict targeting is not observed in practice.\n  - Emerging market inflation targeters typically experience lower variability of both growth and inflation than emerging markets with other monetary policy regimes.\n- Overall empirical implication: flexible inflation targeting has been associated with substantial reductions in inflation without significant cost in terms of growth."
    },
    {
      "heading": "Flexibility and policy design choices under inflation targeting",
      "content": "- Elements of flexibility that can be adapted to country circumstances:\n  - Choice of price index (core vs. headline) depending on which better predicts future inflation.\n  - Numerical value of the target and the width of the tolerance band (wider bands for countries prone to external and supply shocks).\n  - Horizon for achieving the target, matched to the country-specific lags in the monetary policy transmission mechanism.\n  - Forward-looking stance: ability to choose which shocks to respond to and over what period, conditional on well-anchored inflation expectations.\n- Credibility and expectations:\n  - The real anchor of the system is the credibility of the central bank's commitment to the inflation target.\n  - Well-anchored inflation expectations allow lengthening of maturities of fixed-rate instruments and can support long-term financing and growth."
    },
    {
      "heading": "Challenges and problematic issues observed",
      "content": "- Exchange rate versus inflation objective:\n  - Difficulty for central banks transitioning from exchange rate pegs to subordinating exchange rate and competitiveness concerns to the inflation objective.\n  - Market testing of central-bank commitment to inflation targeting has occurred in countries such as Chile, Hungary, and Romania.\n  - Long-term competitiveness is fundamentally a productivity issue; weak exchange rates can provide only temporary competitiveness gains.\n- Shifts in investor sentiment and capital flows:\n  - Inflation targeters are vulnerable to disruptive shifts in investor sentiment affecting exchange markets, growth, and inflation.\n  - Episodes of strong capital inflows have put upward pressure on exchange rates and led to ballooning current account imbalances or foreign exchange reserves.\n  - Central banks have sometimes responded with intervention, administrative measures, or restrictions to slow short-term capital inflows.\n  - Domestic political or fiscal concerns have also triggered turbulence in cases such as Brazil in 2002 and the Philippines; Iceland experienced exchange market pressure linked to large current account imbalances and banking sector vulnerabilities.\n  - Despite pressures, such episodes have not led to breakdowns of inflation-targeting frameworks; they can strengthen policy credibility if the central bank maintains focus on the inflation objective.\n- Limitations:\n  - Inflation targeting is not a panacea for insulating a country from external financial disturbances or real exchange rate influences on competitiveness; it performs similarly to alternative regimes in this respect."
    },
    {
      "heading": "Preconditions and minimum institutional requirements",
      "content": "- Three minimum requirements for successful adoption:\n  - Central bank autonomy and associated accountability to pursue a clear mandate, with government support in words and deeds; fiscal discipline contributes significantly to credibility.\n  - Effective instruments for influencing domestic spending and savings, which generally require functioning financial markets and a reasonably stable financial system.\n  - Adequate economic and financial data, analytical capacity, and a reasonable understanding of monetary transmission to respond in a timely manner to inflation pressures.\n- Trade-offs and adaptability:\n  - Countries further along in developing these elements prior to adoption are likely to achieve greater credibility and better macroeconomic performance.\n  - However, successful adoption has occurred across widely differing initial conditions, illustrating the framework's flexibility and adaptability."
    },
    {
      "heading": "Key findings and policy implications",
      "content": "- No medium- to long-term trade-off between low inflation and growth; a credible commitment to low inflation is good for long-term growth.\n- Flexible inflation targeting that takes short-term output and employment consequences into account is the prevalent and practical approach.\n- Inflation targeting can achieve substantial reductions in inflation without significant growth costs when pursued flexibly.\n- Central bank credibility, fiscal discipline, functional financial markets, data and analytical capacity are important enablers.\n- Inflation targeting does not eliminate vulnerability to capital-flow volatility or exchange rate pressures; policy responses must weigh temporary vs. persistent effects and consider implications for productive capacity.\n\nSource: Remarks at a Panel on Inflation Targeting by Mr. Murilo Portugal, Deputy Managing Director, International Monetary Fund, Washington D.C., May 17, 2007.\n\n---\n\n\n References\n\n- Brazil and the IMF\n- Chile and the IMF\n- Portugal and the IMF\n- Thailand and the IMF\n- Speeches\n- Murilo Portugal\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp051707"
    }
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    "Authors: Murilo Portugal Deputy Managing Director",
    "Published: May 17, 2007",
    "Remarks delivered at a panel on inflation targeting, employment creation, and economic development.",
    "Focus: address whether inflation targeting is compatible with growth, employment, and poverty reduction; how it can be adapted to take account of employment, competitiveness, and growth; and whether reasonable alternatives exist given increased international integration.",
    "Empirical base: experience of inflation targeting in emerging market economies over the prior decade.",
    "First adopted by New Zealand in 1990.",
    "Adopted by 24 countries, of which 16 are emerging market and developing economies.",
    "Expectation: more emerging market and developing countries likely to move to inflation targeting within the next 10 years.",
    "Four main factors driving adoption:",
    "Comparison of periods: most emerging market and developing countries performed much better in growth and inflation since 2000 than during the 1990s.",
    "Inflation reductions: inflation targeters typically cut inflation from over 10 percent per annum to around 4 percent—roughly twice the reduction achieved by non-inflation targeters.",
    "Growth: both targeters and non-targeters enjoyed increases in real GDP growth rates, typically around 2/3 of a percentage point; differences in growth between groups were not statistically significant.",
    "Targeting practice:",
    "Overall empirical implication: flexible inflation targeting has been associated with substantial reductions in inflation without significant cost in terms of growth.",
    "Elements of flexibility that can be adapted to country circumstances:",
    "Credibility and expectations:",
    "Exchange rate versus inflation objective:",
    "Shifts in investor sentiment and capital flows:",
    "Limitations:",
    "Three minimum requirements for successful adoption:",
    "Trade-offs and adaptability:",
    "No medium- to long-term trade-off between low inflation and growth; a credible commitment to low inflation is good for long-term growth.",
    "Flexible inflation targeting that takes short-term output and employment consequences into account is the prevalent and practical approach.",
    "Inflation targeting can achieve substantial reductions in inflation without significant growth costs when pursued flexibly.",
    "Central bank credibility, fiscal discipline, functional financial markets, data and analytical capacity are important enablers.",
    "Inflation targeting does not eliminate vulnerability to capital-flow volatility or exchange rate pressures; policy responses must weigh temporary vs. persistent effects and consider implications for productive capacity.",
    "[Brazil and the IMF](http://www.imf.org/external/country/BRA/index.htm)",
    "[Chile and the IMF](http://www.imf.org/external/country/CHL/index.htm)",
    "[Portugal and the IMF](http://www.imf.org/external/country/PRT/index.htm)",
    "[Thailand and the IMF](http://www.imf.org/external/country/THA/index.htm)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[Murilo Portugal](https://www.imf.org/external/np/omd/bios/mp.htm)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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