What has inflation targeting done for household consumption?

Nadine McCloud

International Review of Financial Analysis, 2024, vol. 95, issue PC

Abstract: Whether households’ consumption level in an Inflation-Targeting (IT) regime, which steers inflation and its expectations, differs from that of a non-IT regime remains empirically unexplored. Using IT as a treatment and acknowledging the potential for country heterogeneity and material confounding factors, we leverage several treatment methods to study the causal, dynamic IT effect on aggregate household consumption across developed and developing countries. We find significant heterogeneous IT effects on aggregate consumption levels in two-thirds of the IT sample. The heterogeneity does not support the notion of an isomorphic average causal IT effect on household consumption across countries. The government’s willingness to meet IT policy adoption preconditions and the country’s fiscal profile are critical drives of this parameter heterogeneity in developing and developed countries. However, the central bank’s appetite for restricting exchange rate movements contributes to this heterogeneity in only developing countries. We find that macroeconomic uncertainty proxied by the inflation level, inflation variability and output growth variability are essential channels in developing countries. In addition, financial development and savings are crucial channels across development status.

Keywords: Household consumption; Inflation Targeting; Precautionary saving; Synthetic control methods; Propensity score matching (search for similar items in EconPapers)
JEL-codes: C21 E21 E31 E52 O57 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:95:y:2024:i:pc:s1057521924004319

DOI: 10.1016/j.irfa.2024.103499

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