Working Group on Economic Policy: WP14112
This paper assesses the emerging market experience with inflation targeting in recent years. It places this experience in the broader context of global monetary policy. It shows that a shift away from rules based policy by many developed country central banks has adversely affected the inflation targeting performance of the emerging market countries. First, it has created direct economic spillovers which have blurred the good effects of inflation targeting. Second, it has led to policy spillovers in which emerging market central banks have been driven to deviate from their inflation targeting rules. The implication of this research is that emerging market countries should stick to the type of inflation targeting they adopted a decade or more ago with macro-prudential policy simply focused on getting the overall risk environment right.