The present study empirically investigates the success of inflation targeting in reducing inflation uncertainty in East Asian countries, especially South Korea, the Philippines and Thailand. An attempt is made to examine whether inflation targeting has any impact on inflation variability in the countries adopting inflation targeting in East Asia. The study makes use of monthly data on Consumer Price Index. The study period spans from January 1970 to May 2010. This provides a rich dataset for the analysis, but some of the indices were introduced recently. The present study has undertaken a comprehensive set of econometric techniques, such as unit root tests, parametric tests (autocorrelation and variance ratio tests) and ARCH-GARCH tests. Towards this end, empirical results of parametric tests provided largely show inflation uncertainty. Finally, the study concludes that inflation targeting has good impact in reducing inflation variability and improving economic growth in South Korea, the Philippines and Thailand.

The high inflation of the 1980s world over and the miseries that the economies went through made it necessary for monetary authorities to make a solid commitment to lower inflation by curbing expected inflation without sacrificing output and employment. This led to the adoption of Inflation Targeting (IT) programs at first by advanced countries in the early 1990s. The unhappy experience with the financial crisis with the drastic increase in international capital flows by the 1990s made the emerging market economies with floating exchange rate regime to take on IT as an alternative nominal anchor. It is a policy to announce what the monetary authority is going to do, in advance, and then doing it. That is, in IT the monetary authority announces the inflation target in advance and then it steers the monetary policy to try to hit that targeted inflation rate. If the inflation is getting above the target, the central bank would ordinarily raise interest rates to cool the economy and bring inflation back down. If the inflation gets too low, the bank would lower rates to juice up growth, raising inflation. New Zealand pioneered adoption of IT in 1990 and the central banks of UK, Canada, Australia, South Korea, Egypt, South Africa, Brazil, Sweden, Finland, Israel, Chile, Hungary, Czech Republic, Poland and Serbia implemented the same or variants of it in the years that followed (Mishkin, 2000). The empirical evidences from these countries on the successes of the program are appreciable. The studies reveal transparency, flexibility and market predictability as the central factors for the success of this framework.

Inflation targeting has been acknowledged as a framework of monetary policy among emerging market economies as well, recognizing the relevance of such a policy to protect their economies in this era of rapid commercial and financial integration. But a framework of IT can be realized only when monetary autonomy is secured, as the countries are more or less integrated with rest of the world. Therefore, the largest difficulty that emerging marketing economies are facing in performing IT is none other than that of securing monetary autonomy in the multifaceted environment of global integration. Given the need for alternative, East Asian countries like South Korea, Indonesia, Thailand and the Philippines adopted IT by late 1990s. At this point an attempt to study the role of this framework in stabilizing these economies is of great relevance that can be extended to the Indian scenario as well.

Monetary Economics Journal, Mexican Inflation Using Wavelets, Wavelet Multiresolution Analysis, Monetary Policy, Financial System, Core Inflation Series, Fourier Transform, Maximal Overlap Discrete Wavelet Transform, Disinflation Process, Services Inflation Series.