Comment on “Flexible Inflation Targeting and Macroeconomic Performance: Evidence from ASEAN”

Nookhwun and Waiyawatjakorn (2024) represent the first systematic empirical assessment of Association of Southeast Asian Nations' (ASEAN) inflation targeting frameworks. Specifically, Nookhwun and Waiyawatjakorn examine the role of ASEAN countries' inflation targeting frameworks in reducing inflation levels and volatility, stabilizing economic growth, and maintaining a robust financial system. Nookhwun and Waiyawatjakorn conclude that the frameworks primarily aid in reducing inflation levels. Yet, they also highlight that ASEAN nations, grappling with capital flow volatility and domestic financial imbalances, have evolved their monetary frameworks to integrate diverse policy instruments like foreign exchange interventions, macroprudential policies, and capital flow measures.

Despite its brevity and clarity, Nookhwun and Waiyawatjakorn (2024) could be enhanced by briefly discussing various complementary policies and public perceptions of inflation.

My first comment relates to complementary policies, in particular, fiscal policy. In addition to the inflation targeting framework, Nookhwun and Waiyawatjakorn note that ASEAN countries also use energy subsidies, price control, and other methods to address short-term global commodity market shocks and inflation. However, they fail to discuss fiscal policy's role in stabilizing economic growth during major crises like the 2008–2009 Global Financial Crisis and the COVID-19 pandemic. The surge in public debt in many ASEAN countries, due to unprecedented government spending, underscores fiscal policy's significance in economic stability during economic shocks. Future research should address the interaction between fiscal and monetary policies.

My second comment relates to inflation expectations and the public's understanding of inflation targeting. The success of inflation targeting is contingent upon the public's expectations being anchored within the bounds set by central banks. Nookhwun and Waiyawatjakorn utilize professional forecasters' short- and medium-term expectations based on Consensus Economics to illustrate that inflation expectations are well-aligned with central banks' targets, implying that the inflation targets announced by central banks have been credible.

However, they overlook the potential limitations in this approach, given the lack of a robust theory on the formation of inflation expectations. In fact, there is a notable gap between the theoretical role of monetary policy in controlling inflation and the corresponding public understanding of this policy. For example, a Bank of Thailand study (Apaitan & Tantasith, 2019) revealed a common misconception among the media that associated inflation control more with price regulation entities (such as the Ministry of Commerce) than with the central bank. This raises questions about the efficacy of inflation targeting in anchoring inflation expectations as the public remains largely unaware of it.

In conclusion, while inflation targeting appears to foster better macroeconomic outcomes in ASEAN countries, the role of complementary policies and effective communication is equally crucial. As Nookhwun and Waiyawatjakorn suggest, further research into these policies and their interaction with monetary policy is essential. This requires an investigation into each country's unique policy context and its central bank's communication strategy.