Inflation Targeting and Private Domestic Investment in Developing Countries

Bao-We-Wal Bambe

No 2022/0237, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: This paper analyzes the effect of inflation targeting on private domestic investment in developing countries. Using propensity scores matching methods, thus mitigating tra- ditional self-selection problems, we find that inflation targeting has led to a 2.05 -2.53 percentage point increase in domestic investment in targeting countries compared to non- targeting ones. Estimates are economically meaningful and robust to various checks, notably sample changes, additional controls, alternative estimation methods, and falsifi- cation tests. A few heterogeneity features of the treatment effect are further highlighted, depending on some factors. Finally, we explore the main transmission channels and iden- tify monetary policy credibility as the key driver of the regime’s effectiveness.

Keywords: Inflation targeting; Private domestic investment; Developing countries; Propensity score matching; Monetary policy credibility (search for similar items in EconPapers)
JEL-codes: E22 E51 E52 E58 E62 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-dev and nep-mon
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