Since inflation targeting (IT) began about a quarter of a century ago, a number of
industrialised and an increasing number of emerging and developing countries
have adopted it as a framework for conducting monetary policy. Empirical
evidence from developed economies suggests that the framework has been
associated with low and stable inflation, and a reduction in inflation volatility. The
evidence for African countries and other developing regions is not conclusive.

Zambia is contemplating a policy of targeting inflation. This article assesses the
readiness of Zambia for IT. We find that a number of preconditions for successful
adoption are not fulfilled. Thus, while the idea itself has much merit, IT in an
unprepared environment may produce perverse incentives, and complicate both
fiscal and monetary policy. It is thus imperative that policy makers in Zambia and
elsewhere in the developing world address the preconditions highlighted in this
article, before adopting a fully-fledged IT policy.

JEL codes: E3, E4, E5

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Keywords

economic stability, financial development, inflation targeting, monetary policy, Zambia