Integrated inflation targeting - Another perspective from the developing world

This book by Pierre-Richard Agénor of the University of Manchester and Luiz Pereira da Silva of the BIS provides a thorough assessment of recent experiences with inflation targeting (IT), the challenges it has faced since the global financial crisis, and ways in which these challenges have been, or should be, addressed. The discussion is conducted from the perspective of middle-income countries (MICs). As background for the analysis, Chapter 1 provides a review of key features of the financial system (with a focus on the role of bank credit) and the regulatory environment in MICs, the extent to which exposure to short-term capital flows affects economic stability in these countries, and the link between excessive credit growth and financial crises. Chapter 2 outlines the main characteristics of IT regimes, compared to other monetary policy regimes. Chapter 3 provides a detailed review of the evidence on the performance of these regimes in MICs. Both formal and informal evidence is considered. Chapter 4 discusses a number of challenges that IT has faced, including imperfect policy credibility, fiscal dominance, exchange rate volatility and the fear of floating, and the role of financial stability considerations in conducting monetary policy. The issue of whether monetary policy and macroprudential regulation are complements or substitutes, in a setting where both macroeconomic and financial stability matter, is taken up in Chapter 5. The analysis suggests that there are robust arguments to support the view that, in the context of an integrated inflation targeting (IIT) regime where central banks are concerned with achieving and maintaining both price and financial stability, monetary and macroprudential policies are complements. Issues associated with the design and practical implementation of IIT regimes are addressed in Chapter 6. The discussion emphasises the need to calibrate monetary and macroprudential policies jointly. Chapter 7 summarises the main policy lessons that can be drawn from the analysis.