RDP 2004-04: Inflation Convergence Across Countries 6. Conclusion

Ball and Sheridan argue that it is an open question whether the improvement in the inflation performance of inflation-targeting countries in the 1990s is largely a function of monetary policy or of ‘regression to the mean’, but lean towards the latter explanation. The analysis in this paper suggests instead that the improved performance is largely a function of monetary policy decisions, in particular the clear commitment to anti-inflation policies that became common in the 1990s, including inflation targeting. However, Ball and Sheridan are no doubt correct in saying that more definitive conclusions on the success of inflation targeting will only be feasible after a number of decades of experience with the regime.

In a world where central banks closely watch each other, one might have expected that countries with relatively poor inflation performance would seek to emulate the policies of countries that had been successful in maintaining low inflation. Hence, the fact that the convergence of inflation rates at low levels did not occur until the 1990s is somewhat puzzling. A plausible explanation would seem to be that by the start of this decade there was both broad consensus that high inflation was costly, and institutional changes in many countries that allowed central banks to more actively pursue the goal of low and stable inflation. Inflation targeting was the framework adopted by a number of countries in their quest for low inflation.

The question remains as to whether regimes such as exchange rate or monetary targeting would have been as successful as inflation targeting for those countries with high inflation that adopted inflation targeting. As has been shown in this paper, the eventual inflation targeters were different from other countries in that they had a history of nearly two decades of inflation rates higher than their peers. Also, some of the eventual inflation targeters unsuccessfully operated both exchange rate and monetary-targeting regimes prior to their adoption of inflation targeting. This suggests that inflation targeting may have indeed been the best choice of regime for these countries over the past decade.