Does inflation targeting live up to all the hype?

Yadavindu Ajit () and Taniya Ghosh
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Yadavindu Ajit: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: This study examines the effects of inflation targeting on inflation levels, its volatility, and its persistence in emerging market economies. To better estimate the dynamic treatment effects of inflation targeting the study uses a larger set of data, including 59 emerging market economies, an extended sample spanning 1985-2019, and a methodology that takes into account the staggered adoption of inflation targeting by these economies. Traditional models used in the literature failed to account for staggered adoption, resulting in biased estimates. Inflation targeting has been shown to significantly reduce inflation levels in emerging markets, especially when hyperinflationary economies are excluded. Results indicate significant reductions in inflation three to four years after adoption. In comparison, the findings for inflation volatility and persistence are more nuanced. Standard models indicate initial volatility reductions, but models that account for staggered adoption show no significant long-term impact. Moreover, inflation targeting has no significant impact on inflation persistence, even in more stable environments. These findings highlight the effectiveness of using models that account for staggered policy adoption when evaluating long-term policy impacts, and they suggest that, while inflation targeting is a viable tool for reducing inflation in emerging markets, its broader effects on inflation volatility and persistence have been limited.

Keywords: Dynamic treatment effect; Emerging market economies; Inflation; Inflation persistence; Inflation targeting; Inflation volatility (search for similar items in EconPapers)
JEL-codes: C21 C22 E31 E52 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2024-11
New Economics Papers: this item is included in nep-cba and nep-mon
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