Inflation targeting in Zambia: panacea or a. case of misplaced expectations

The past decade has arguably witnessed the emergency of inflation targeting as the key monetary policy innovation. Accordingly, there has been an important debate on the desirability of this new regime. In the last 15 years or so, an increasing number of central banks have adopted inflation targeting as their preferred framework for the conduct of monetary policy. Although it was initially confined to industrialised countries, many developing countries are also increasingly adopting the inflation targeting regime. This paper seeks to evaluate the feasibility and applicability of this framework for monetary policy in Zambia. Using evidence from South Africa, this paper argues that although the presence of certain preconditions could not be confirmed in Zambia, inflation targeting still constitutes a feasible and advisable framework. The paper casts some doubt on the presence of these prerequisite conditions in Zambia although in practice the country can be characterised as already pursuing an implicit inflation targeting framework. The study finds that monetary authorities are currently pre-occupied with achieving single digit inflation and as such it can be argued that it is only a matter of time before adopting a fully fledged inflation targeting regime. In the meantime, the paper suggests financial system deepening, reduction of fiscal dominance and central bank independence. The paper concludes that these aspects are not only crucial in determining the speed and efficacy of transmission mechanisms of monetary policy under an inflation targeting framework but also have an impact on the transparency and credibility of monetary policy which are relevant for anchoring economic agents' future inflation expectations. Consequently, swift progress' on improving these conditions is essential for reaping full bonuses associated with inflation targeting.