Can Emerging Markets Float? Should They Inflation Target?

The crises of the 1990s convinced many observers that intermediate exchange rate arrangements are fragile and crisis prone. But advising emerging markets to abandon the exchange rate as an anchor for policy compels those issuing the call to offer an alternative. This paper asks whether inflation targeting is a viable alternative for emerging markets. It focuses on the distinctive characteristics of the policy environment that bear on its feasibility: fast pass through, the difficulty of forecasting inflation, liability dollarization, and imperfect credibility.