This document discusses the effect of inflation targeting on emerging market economies. It begins by outlining why lower inflation and inflation targeting are important for emerging markets to integrate into the global economy. It then describes how inflation targeting works by having central banks set interest rates to ensure inflation meets multi-year targets. However, emerging market realities like high inflation inertia and inconsistent fiscal policies can pose difficulties for inflation targeting. The document analyzes case studies of inflation targeting in countries like Turkey, Israel, Mexico, and Chile and their experiences bringing inflation down.

1. Effect of Inflation Targeting on Emerging Markets Economies 1 Leonardo Leiderman 17 October 2002

7. Israel: High Inflation Preceded Gradual Inflation Convergence Under IT 7

8. Mexico’s Disinflation 8

9. Inflation and Inflation Targets in Chile ( a) 9 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 Source: Landerretche , Morande , and Schmidt- Hebbel (1998). ( a) Target is set in September for the following calendar year

10. Israel….. 10

11. THE EXCHANGE RATE OF THE NIS VIS-A-VIS THE CURRENCY BASKET 11

12. Israel's budget deficit - % of GDP 12

13. Monetary Policy Reaction to Expected- Inflation Scares: The Case of Israel 13

14. Real ex-ante Bank of Israel interest rate the nominal rate less market based inflation expectations for the next 12 months 14

15. The Bottom Line: Current Nominal and Real Interest Rates 15

16. Fiscal Discipline is Crucial: The Case of Brazil Net public debt (% of GDP) PSBR (% GDP) 16

18. Effect of Inflation Targeting on Emerging Markets Economies 18 Leonardo Leiderman 17 October 2002