{"id":272235,"date":"2025-11-09T01:34:12","date_gmt":"2025-11-09T01:34:12","guid":{"rendered":"https:\/\/www.newsbeep.com\/au\/272235\/"},"modified":"2025-11-09T01:34:12","modified_gmt":"2025-11-09T01:34:12","slug":"imf-economists-say-inflation-targeting-hasnt-performed-brilliantly-in-recent-years","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/au\/272235\/","title":{"rendered":"IMF economists say inflation targeting hasn’t performed brilliantly in recent years"},"content":{"rendered":"

A new working paper<\/a> from the International Monetary Fund (IMF) has found something fascinating.<\/p>\n

It says the 2022 inflation surge, driven by skyrocketing energy prices and widespread supply chain disruptions, hit nearly every economy on the planet, creating a real-life experiment to test which countries controlled inflation better.<\/p>\n

And what does it find?<\/p>\n

RBA holds interest rates in November<\/a><\/p>\n

The Reserve Bank has kept interest rates on hold at 3.6pc after hotter-than-expected inflation in the September quarter squashed hopes of a rate cut.<\/p>\n

Do you think countries that practice formal inflation targeting (IT), such as Australia, had better inflation outcomes than countries that don’t practice inflation targeting (non-IT)?<\/p>\n

According to the IMF’s economists, there was little difference.<\/p>\n

They say IT central banks (which includes Australia’s Reserve Bank) hiked interest rates by more than non-IT central banks on average, but that did not help to achieve better inflation outcomes.<\/p>\n

“This finding is striking,” their paper says.<\/p>\n

“Decades of theory have held a view that IT regimes should deliver better inflation outcomes through credibility, transparency, and the anchoring of expectations.<\/p>\n

“But the data did not bear that out, at least in the near aftermath following the shock. That was not just a statistical fluke and deserves a closer look.”<\/p>\n

It’s quite the finding.<\/p>\n

Do they criticise inflation-targeting?<\/p>\n

The paper was written by IMF economists Patrick A. Imam<\/a> and Tigran Poghosyan<\/a>.<\/p>\n

Importantly, they don’t argue that inflation targeting doesn’t work. They say it does work, particularly in economies that are vulnerable to “demand-side imbalances” and “demand-driven inflationary shocks”.<\/p>\n

RBA has never known what to do about property prices<\/a><\/p>\n

The “inflation nutters” in New Zealand adopted inflation targeting first, and Australia pinched their idea. But the policy has unresolved issues, a former RBA deputy governor says.<\/p>\n

However, they say the global inflation surge of 2022 was a unique beast because it was largely driven by global supply shocks.<\/p>\n

And in the decades since countries starting adopting inflation-targeting frameworks in the 1990s, there hasn’t been a global supply shock event that has put IT regimes to the test.<\/p>\n

They say the last comparable episode was the oil price shocks of the 1970s, but that predated the widespread adoption of IT frameworks in the 1990s, so we haven’t known how IT regimes would perform when inflation was largely supply-side in nature.<\/p>\n

Until now.<\/p>\n

“There’s no better way to stress-test a monetary policy framework than during a genuine global crisis,” they write.<\/p>\n

“For years, debates over whether IT regimes outperform their non-IT counterparts have unfolded in academic journals and central bank seminars.\u00a0<\/p>\n

“The 2022 supply-side inflation surge offers an opportunity to analyse the comparative performance of IT and non-IT central banks in a real-world context.”<\/p>\n

What did they find?<\/p>\n

They analysed the inflation outcomes for 33 IT and 37 non-IT countries.<\/p>\n

They say following Russia’s invasion of Ukraine in 2022, consumer price inflation (CPI) soared across the board, averaging about 9 per cent globally.<\/p>\n

But the difference in inflation trajectories between IT and non-IT countries was “not statistically significant”.<\/p>\n

\"Inflation\"Non<\/p>\n

They say inflation-targeting countries, on average, experienced about 1.5 percentage points higher inflation than their non-IT counterparts throughout the sample period.<\/p>\n

In the graph below, the orange line shows the evolution of inflation in IT countries, and the blue line shows inflation in non-IT countries.<\/p>\n

\"Average<\/p>\n

They say inflation also declined more sharply for non-IT countries.<\/p>\n

“These results suggest that the presumed advantage of inflation-targeting frameworks in buffering economies during the 2022 inflation surge may not have been as strong as often assumed,” they write.<\/p>\n

“There is no systematic evidence that IT central banks were more successful in insulating economies from global price pressures.”<\/p>\n

Inflation fell faster in non-IT countries<\/p>\n

To dig below the averages, they then controlled for different variables unique to each country, including a country’s inflation history, institutional quality, labour market structure, exchange rate regime, or fiscal policy dominance.<\/p>\n

That allowed them to compare each country’s inflation to its own historical baseline.<\/p>\n

No more rate cuts?<\/a><\/p>\n

Will 3.6 per cent be as low as the Reserve Bank’s cash rate gets? A majority of economists now believe so.<\/p>\n

They say that exercise provided a more nuanced picture of inflation between IT and non-IT countries.<\/p>\n

They say before the 2022 inflation surge, the demeaned inflation in IT and non-IT countries was broadly comparable, with little evidence of systematic differences between the two groups.<\/p>\n

But after the shock, a divergence emerged.<\/p>\n

While the surge in inflation was broadly comparable across IT and non-IT countries in 2022, inflation in non-IT countries declined more quickly after the initial spike relative to their IT counterparts in 2023.<\/p>\n

See the graph below.<\/p>\n

\"A<\/p>\n

They also found that IT countries were no better at engineering a “soft landing” for their economies than non-IT countries.<\/p>\n

“IT countries did not achieve smoother landings, nor did they manage to dis-inflate with significantly less economic pain,” they say.<\/p>\n

“This finding challenges one of the foundational promises of IT that greater credibility allows central banks to bring down inflation with less output losses.”<\/p>\n

How can we handle the ‘new inflation’?<\/p>\n

The IMF economists say their findings are significant.<\/p>\n

They say for much of the past 40 years, inflation has been understood as a predominantly demand-driven phenomenon.<\/p>\n

Want to lower inflation? Stop indexing important prices to CPI<\/a><\/p>\n

There are a lot of different ways to dampen inflation, according to two of Australia’s most respected economists.\u00a0<\/p>\n

They say modern central banks have been operating in a world in which they adjust interest rates, governments manage the business cycle, and macro-economic models operate on the premise that inflationary pressures can be effectively contained through aggregate demand management.<\/p>\n

In such a world, supply-side disturbances have typically been viewed as transitory and driven by quirky factors, and they have not been global in scale and synchronised across economies.<\/p>\n

“But that paradigm is now under increasing strain,” they write.<\/p>\n

“The global economic order that underpinned this model characterised by abundant resources, liberalised trade, and geopolitical stability is fracturing.\u00a0<\/p>\n

“Instead of isolated, temporary shocks, we are entering a period marked by sustained and overlapping supply disruptions, many of which are structural and slow moving.”<\/p>\n

What should authorities do about it?<\/p>\n

They say if supply-side driven inflation starts to become more persistent \u2013 they dub it the “new inflation” \u2013 it will challenge the framework and require adaptation.<\/p>\n

“Central banks today operate in a more complex and uncertain environment than during the earlier decades of IT,” they argue.<\/p>\n

“While the IT framework continues to offer important benefits, its application may need to adapt to the growing challenges posed by more frequent, global, and persistent supply-side shocks.<\/p>\n

“The 2022 experience suggests that front-loaded tightening [of interest rates] does not guarantee improved inflation outcomes, raising questions about the appropriate pace and scale of response.”<\/p>\n","protected":false},"excerpt":{"rendered":"A new working paper from the International Monetary Fund (IMF) has found something fascinating. It says the 2022…\n","protected":false},"author":2,"featured_media":272236,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[64,63,99,5299,30018,59249,15324,183],"class_list":["post-272235","post","type-post","status-publish","format-standard","has-post-thumbnail","category-business","tag-au","tag-australia","tag-business","tag-central-banks","tag-consumer-price-index","tag-inflation-targeting","tag-international-monetary-fund","tag-reserve-bank-of-australia"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/272235","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=272235"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/272235\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/272236"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=272235"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=272235"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=272235"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}