[Author Affiliation]Shu Lin, , , , shulin75@gmail.comHaichun Ye, , , , haichunye@gmail.com[Acknowledgment]The authors would like to thank Kent Kimbrough and two anonymous referees for valuable comments.1. IntroductionOne of the most important recent innovations in the conduct of monetary policy is inflation targeting, in which a monetary authority makes public an estimated inflation rate (or range) and attempts to steer the actual inflation toward the target using monetary tools. Since its emergence in the early 1990s, inflation targeting has certainly been gaining popularity over the last two decades. By the end of 2006, 27 countries, among which 17 are developing countries, had explicitly adopted this new monetary policy regime.The emergence of inflation targeting has attracted substantial attention from both researchers and policymakers. Numerous studies have empirically evaluated the effects of adopting an explicit inflation-targeting regime on a country's economic performance, especially on inflation and growth. While studies focusing on advanced industrial countries so far have yielded mixed results, the evidence in developing countries seems to be more robust.1 Batini, Kuttner, and Laxton (2005), Goncalves and Salles (2008), and Lin and Ye (2009) all find that inflation targeting significantly lowers inflation in developing countries where the credibility of the central bank has not yet been well established (thus, the credibility gain of adopting an explicit inflation-targeting regime is substantial). In addition, CapistrAn and Ramos-Francia (2010) show that inflation targeting significantly lowers the dispersion of inflation expectations in developing countries. Two recent survey articles, Walsh (2009) and Ball (2010), also concluded that inflation targeting has larger beneficial effects in developing countries than those in advanced industrial countries.Despite the success of inflation targeting in developing countries, the more traditional exchange-rate-targeting framework still remains the dominant monetary policy regime in developing countries. It is so popular that an influential study by Calvo and Reinhart (2002) finds an epidemic case of "fear of floating" in the developing world.2 Furthermore, similar to inflation targeting, an exchange-rate-targeting regime (especially a credibly enforced one) is also viewed as an effective means to achieve price stability in developing countries because it serves as a nominal anchor by allowing a developing central bank to borrow credibility from a foreign monetary authority. In a strict exchange-rate-targeting framework, the targeting country's inflation rate should be equal to that of the country (usually a low-inflation, rich country) to which its exchange rate is pegged.Does an inflation-targeting framework outperform an exchange-rate-targeting regime in achieving price stability in developing countries? If so, does this benefit come at a cost of slower growth? These two important and policy-related questions have not yet been examined in the literature. A common feature of previous studies is that they all compare an inflation-targeting regime with a very broad alternative, namely, a non-inflation-targeting regime, while ignoring the substantial heterogeneity in the monetary policy regimes adopted by non-inflation-targeting countries. A disadvantage of comparing inflation targeting with such a broad alternative is that the results may not be of direct use for policy choices.The objective of this study, therefore, is to make the first attempt in the literature to conduct a direct empirical comparison of the emerging inflation-targeting framework with the popular exchange-rate-targeting regime in developing countries. In particular, we compare the effects of these two monetary policy regimes on two key outcome variables, inflation and economic growth. Our study is built upon three recent empirical works on the effects of inflation targeting in developing countries, including Batini, Kuttner, and Laxton (2005), Goncalves and Salles (2008), and Lin and Ye (2009), but we focus on directly comparing inflation targeting with exchange-rate targeting. …