Targeting inflation in Asia and the Pacific: lessons from the recent past

Abstract

Introduction Central banks in Asia and the Pacific have overwhelmingly chosen inflation as the principal objective of monetary policy. Some central banks have declared themselves to be inflation targeters, while others pursue their objective without referring to this particular label. Moreover, whether or not they refer to their strategy as inflation targeting, central banks in the region have chosen diverse approaches to achieving their inflation targets, for example with respect to how explicit the target is, the choice of inflation indicator and the choice of instrument. All this suggests that the region constitutes a good sample with which to examine the lessons from the experiences of central banks that have adopted formal inflation targeting and those with more eclectic approaches to targeting inflation. To this end, we examine monetary policy institutional changes in Asia and the Pacific to assess whether these can be traced to subsequent inflation performance. Section 8.2 highlights trends in twelve regional economies towards greater central bank focus on inflation control, institutional independence and transparency over the past two decades. Contrasting the experiences of the six formal inflation-targeting economies with those of the six others, section 8.3 explores the impact of these trends on inflation dynamics and on private sector inflation expectation formation. Section 8.4 then addresses some policy implications associated with the evolving views of targeting inflation in the region, and concludes that our results add to the growing body of evidence that formal inflation targeting is not the only monetary policy framework capable of delivering price stability; in other words, targeting inflation is important, but there are many ways to skin that cat.

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