Inflation Targeting Twenty Years On:

Where? Why? ...

by Klaus Schmidt-Hebbel

Comments by:Stefan Gerlach

University of Frankfurt

Draws from the literature to address many questions:

1. When and where was IT adopted?2. What led to the decision to adopt IT?3. Inflation deviations from targets4. Inflation levels5. Efficiency of monetary policy6. Transparency7. Current challenges

Literature referred to shares many features:

• Large panels/many countries (98 countries of which 28 are ITers)

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This is a strength of the paper …• “Neat idea – something that someone should

do.”

… but also a weakness since it makes it difficult to attend to all details:

• Inflation measure in Norway?• Adoption of IT in Switzerland?• How should IT be defined?

E.g. ECB & SNB use similar strategies.

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Decision to adopt IT:• Fiscal position• Financial/economic development

Most important in cross-section• Trade openness• Regional dummy for Latin America• Floating exchange rate

Multinomial logit/probit.• Inflation

Endogenous variable. Gerlach (EER, 1999): CBI, commodities &

supply shocks.

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• Distinction between early and late ITers? Role of IMF?

• How well does the model fit? Problems? Large countries?

Why/how does inflation targeting “work”?• Paper establishes that countries with IT have

lower inflation than reference group.• Why?

Paraphernalia Greater focus on inflation Unobservables

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Conclusions• Interesting summary of the cross-sectional

literature.• Quite a bit more could probably be squeezed

out of these papers/data.

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