Dumisani Hompashe

Is Inflation Targeting a Viable Option in Developing Countries Dumisani Hompashe

The distinctive features of inflation targeting include the publishing of the formal target band or point target for the rate of inflation at one or more time horizon/s and the explicit confirmation that low and steady inflation is the long-run objective of monetary policy. There are four main preconditions of inflation targeting: 1) an independent central bank that is free from fiscal and political pressures; 2) a central bank that has both the ability to forecast inflation and the capability to model inflation data; 3) the presence of fully deregulated prices and an economy that is affected by changes of commodity prices, as well as exchange rates; and 4) the presence of sound banking system and well developed capital markets. This dissertation investigates the extent to which Malawi meets the preconditions for inflation targeting. Malawi is committed to the central bank?s functional independence as well as the pursuit of prudent fiscal policy measures for the attainment of low inflation. Despite the failure to meet all the preconditions, this study recommends that Malawi should adopt an inflation-targeting framework.