Assessing inflation targeting after a decade of world experience

Abstract

Ten years of inflation targeting worldwide provide valuable lessons. Inflation targeters (ITers) have been very successfulin meeting their inflation targets (ITs). Industrial output sacrifice during inflation stabilization and industrial outputvolatility has frequently been lowered after IT adoption. ITers have consistently reduced inflation forecast errors afterIT adoption. The influence of price and output shocks on the behaviour of inflation and output gaps has changed muchmore strongly among ITers than in non-targeting industrial countries in the course of the 1990s. IT has played a role instrengthening the effect of forward-looking expectations on inflation, hence weakening the weight of past inflationinertia. Central bankers’ aversion to inflation is, on average, not different among ITers in comparison to NITers but hasrisen in emerging-country ITers. ITers have gradually reaped a credibility gain, allowing them to achieve their targetswith smaller changes in interest rates in the late 1990s than the changes that were required in the early 1990s