Inflation Targeting in Emerging Economies: A Comparative Sacrifice Ratio Analysis

Abstract

In recent years, inflation targeting (IT) has emerged as the leading framework for monetary policy around the world.¹ The aim of inflation targeting is to contain inflationary expectations and enhance accountability regarding monetary policy by making a numerical target a medium-term objective. A growing number of studies have evaluated the performance of IT for industrialized countries (see Laubach and Posen, 1997; Bernanke et al., 1999; Honda, 2000), but little attention has been given to emerging economies (see Bogdanski et al., 2000; Leiderman and Bufman, 2000; Fraga et al., 2003). Countries such as Brazil, Chile, the Czech Republic, Israel, Mexico and South Africa implemented IT during the 1990s. Some of these emerging economies have been forced to implement most of the IT requirements as a consequence of serious financial crises (see Masson et al., 1997; Agénor, 2000; Schaechter et al., 2000).² However, they have followed successful strategies for disinflation during the transition towards a fully fledged IT regime.³