News - The IMF has begun to doubt the effectiveness of inflation targeting.

YEREVAN, November 14 — /ARKA/. The inflation-targeting (IT) regime, which for decades was considered a universal, effective instrument for stabilizing prices, did not provide advantages during the global inflation shock of 2022. As Vedomosti writes, such conclusions are contained in the IMF report “How Inflation Was Tackled in 2022: A Comparative Analysis of Central Banks That Do and Do Not Target Inflation.” IMF calculations showed that, despite decisive and early rate hikes, central banks with an IT regime did not achieve statistically significantly better performance than their counterparts without targeting. The authors analyzed data for 70 countries, 33 of which had IT and 37 did not. Countries with the most stringent central-bank policy included Japan, Indonesia, Russia, the Czech Republic, Canada, Israel, Iceland and others. Countries not pursuing IT included the United States, China, Switzerland, Vietnam, Singapore, Saudi Arabia, the UAE and others. “During an inflation episode, driven not by demand overheating but by external shocks, such as war, energy-price volatility, and logistics disruptions, central banks with IT policy did not yield noticeable results compared with other central banks,” IMF experts note. In 2024 BIS experts reached similar conclusions in the working paper “Taylor Rule Targeting: Some Evidence and Theory.” The economists argued that monetary policy should not be too tight if inflation is driven by supply constraints rather than by demand growth. BIS researchers proposed a new concept—the “Taylor Target Rule,” based on the Federal Reserve doctrine—which calls for a softer policy when inflation is driven by supply factors. The Taylor Rule is a classical model used by central banks when deciding the policy rate on the basis of inflation, GDP and other economic conditions. Why is this explained? IMF calculations, surprising even to the authors, show that in both IT and non-IT countries inflation in 2022 averaged about 9%, not exceeding the bounds of statistical significance. Researchers, aiming for a more objective assessment of policy, added a fixed-effects factor (a statistical model used to analyze data and account for unobserved country-specific differences) as noted by Vedomosti. This helped reduce the influence of differences in the economic structure of countries observing and not observing the target. The authors conclude that modern inflation more and more often results from deteriorating supply rather than demand growth, and in this case the established demand-driven inflation model performs worse. When price increases are caused by external factors, households and firms are less likely to expect that monetary policy will quickly bring inflation down, IMF experts write. “Trust in the central bank depends not so much on statements as on the rapid containment of real inflation,” note the IMF. This is one of the tenets of inflation targeting—the public nature of central-bank statements and the regulator’s accountability for price levels. And yet the IMF is not prepared to write off inflation targeting altogether. The organization argues that it can be useful, especially in countries prone to demand imbalances and where trust in the central bank is only forming. But in modern realities, regulators require a more flexible approach, the report’s authors say. A period of stability in trade is followed by a “period of structural problems in supply chains,” the IMF emphasizes, hinting at recent events related to tariff wars, and that in the current situation inflation-targeting policy, just as in 2022, risks not delivering. This is driven not only by tensions between China and the United States but also by tensions in the Middle East and the growing “economic nationalism,” the report says.