BIS Papers No 8 - Modelling aspects of the inflation process and the monetary transmission mechanism in emerging market countries Nov 2001

Two major developments marked the monetary sector in emerging market economies (EMEs) in the 1990s. One was the steady decline in the inflation rate to low levels in the second half of the decade. The other was the growing preference for conducting monetary policy based on inflation targeting. For example, average inflation in 10 of the 14 EMEs discussed in this paper declined to a single digit rate in the second half of the 1990s, compared to only four in the first half. By the end of 2000, over half had switched to direct targeting of inflation. This change has meant a significant shift in the emphasis given to price stability in the monetary policy framework in EMEs as well as in the approach to controlling inflation. To be sure, this has underlined the key role for the central banks in the determination of inflation.