This paper surveys possible monetary policy options for emerging market countries. As the paper does not seek to enter into the fix versus flex debate, it only considers monetary policy options for countries with a flexible exchange rate. After making the point that the conduct of monetary policy requires a nominal anchor and surveying different types of nominal anchors, the paper suggests that most academics and policymakers agree on the fact that inflation targeting should be the nominal anchor of choice. Hence, the paper describes the main characteristics of an inflation targeting regime and discusses its applicability to emerging market countries. Next, the paper recognizes the necessity of coordination between fiscal and monetary policy and points out that, in order to conduct countercyclical fiscal policies, emerging market countries need to build fiscal institutions that allow accumulating surpluses during periods of economic expansion. The paper concludes by studying the applicability of inflation targeting to Egypt and finds mixed support for this option.
Author(s): Ugo Panizza