Final answer:
For developing countries, inflation targeting has been linked to improved macroeconomic performance, but it is important to strike a balance between inflation targeting and other objectives like growth and employment.
Step-by-step explanation:
Inflation targeting is a monetary policy in which a central bank aims to keep inflation at a specified target rate. This approach to monetary policy has been adopted by several countries as part of their strategy to maintain financial stability. A study by economist Carl Walsh found that for developed countries, inflation targeting resulted in similar inflation experiences, whether they had explicit targets or more flexible ones. However, for developing countries, inflation targeting has led to enhanced macroeconomic performance, achieving both lower inflation and greater stability.
The question of whether developing countries should adhere strictly to inflation targeting is complex. While targeting inflation provides clear benchmarks for policy and helps to anchor expectations, developing countries must also be mindful of their unique challenges, such as growth and employment. Thus, a balance between inflation targeting and other economic objectives, similar to the approach taken by the Federal Reserve in the United States—which considers both unemployment and inflation—might be advisable.