Much more than announcing a numerical target

ACCORDING TO Mishkin (2001), the elements outlined above should clarify that the process of inflation targeting is much more than a public announcement of numerical targets for inflation for the coming years. He outlines that many emerging market economies routinely reported numerical inflation targets or objectives as part of the government’s economic plan for the coming year. Yet, their monetary policy strategy and the functioning of the economy does not reflect the elements of proper inflation targeting. As a result, their inflation target may not be credible over time.

If you look at the elements closely, all resemble the art of moral suasion, none appear to be an occurrence of the real economy. The central bank has two tools available to it – the money supply and interest rates, which impact the real economy through the monetary transmission mechanism.

In order to properly target inflation, the interest rate channel must be fluent, where commercial banks pass through benefits earned from a lower BOJ policy rate to consumers and investors. Prior to Jamaica adopting the inflation-targeting strategy, Haughton and Iglesias (2013) found evidence to suggest a weak pass-through rate in Jamaica and many other Caribbean countries. Mukherjee and Bhattacharya (2011) have found evidence to suggest that the adoption of inflation targeting, a monetary policy tool in emerging market economies, has not significantly affected the interest channels and, by extension, the fluency of monetary policy in emerging market economies.

This means that there is no guarantee that inflation targeting will increase the fluency of the monetary transmission mechanism and, as a result, might not improve the ability of the BOJ to achieve its objectives.