How to Design and Review Inflation Targets in Emerging Market and Developing Economies

A cornerstone of all successful inflation-targeting regimes is a strong commitment to price stability as the primary objective of monetary policy, operationalized through a clearly defined inflation target. When setting targets in the context of emerging market and developing economies, policymakers face a range of specific challenges relative to their counterparts in advanced economies, often including a more volatile economic environment and weaker institutional backdrop. This How-To Note provides conceptual and practical guidance on how these and other key factors shape the appropriate design of inflation targets in emerging market and developing economies, covering not only the target level, but also the specific inflation measure to be targeted, the relevant time horizon for meeting the target, and the width and interpretation of any associated bands. The note also covers: (1) key considerations involved in reviewing and potentially adjusting the specification of the target, stressing careful management of the heightened risks to credibility that these processes tend to entail for emerging market and developing economies; and (2) special issues associated with disinflation programs.