The Journey to Inflation Targeting: Easier Said than Done The Case for Transitional Arrangements along the Road
IMF Working Papers, June 25, 2015
Source details
- Canonical URL
- The Journey to Inflation Targeting: Easier Said than Done The Case for Transitional Arrangements along the Road
Other formats
Bibliographic details
- Authors: Bernard J Laurens, Kelly Eckhold, Darryl King, Nils Øyvind Mæhle, Abdul Naseer, Alain Durré
- Published: June 25, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513567990.001
Summary
- Countries with evolving monetary regimes that decide to embark on “the Journey to inflation targeting” may not be able to adopt a full-fledged inflation targeting regime immediately.
- Those countries would be better off adopting transitional arrangements that:
- take advantage of the informational content of monetary aggregates,
- develop an economic analysis capacity, and
- concentrate on monetary operations aimed at steering money market interest rates.
- This approach would allow the central bank to:
- buy time for developing the building blocks for effective monetary policy,
- support transparent central bank communication, and
- limit the potential for undesirable outcomes along the road.
Key findings
- Transitional arrangements are preferable to immediate adoption of full-fledged inflation targeting for countries with evolving monetary regimes.
- Monetary aggregates contain informational content useful during the transition.
- Strengthening economic analysis capacity is an essential component of the transition.
- Focusing on monetary operations to steer money market interest rates supports the transition process.
- Transparent central bank communication plays a key role in limiting undesirable outcomes.
Policy recommendations
- Adopt transitional arrangements rather than immediate full-fledged inflation targeting where appropriate.
- Use monetary aggregates as part of the informational framework during the transition.
- Develop analytical capacity within the central bank to support policy decisions.
- Concentrate monetary operations on steering money market interest rates to facilitate monetary policy implementation.
- Enhance transparency in central bank communication to manage expectations and limit undesirable outcomes.
Implementation considerations
- Transitional arrangements provide time to develop the necessary building blocks for effective monetary policy.
- Central banks should align balance sheet management and operational frameworks to support steering of short term interest rates.
- The transition requires coordinated effort across institutional functions, including central bank independence and communication strategies.