Does Inflation Targeting Work in Emerging East-Asian Economies?

Abstract

This paper evaluates on the performance of the inflation-targeting regime in three emerging East-Asian economies that have experienced changes in monetary policy regimes, from rigidities to a flexible exchange rate and inflation targeting, after the financial crisis of 1997-98. In particular, the evaluation focuses on the inter-relationship between inflation and the output growth/gap in these emerging economies between the pre- and post-inflation-targeting periods. A bivariate GARCH (1,1) model is applied. The results reveal lower variability in inflation and output growth after the implementation of the inflation targeting regime. The persistency of inflation and output also decline. The study finds no evidence of greater disinflation cost experienced in these economies after the implementation of the inflation-targeting regime. Overall, the results imply that inflation targeting works well in these emerging markets.

Key words: Disinflation cost, Inflation targeting, Macroeconomics, Trade-off, Monetary policy.
JEL: E52, N10.