 Does domestic investment respond to inflation targeting? A synthetic control investigationInternational Economics, 2022, vol. 169, issue C, 98-134 Abstract: Some countries have adopted an Inflation Targeting (IT) regime to reduce inflation and inflation uncertainty: two factors the literature suggests firms put positive weight on when making outlay decisions that may affect aggregate domestic investment. This observation naturally leads to the question of whether domestic investment responds to IT. We apply the synthetic control method to developed and developing IT and non-IT countries to estimate the IT regime's causal effect on the domestic investment over time while addressing country heterogeneity. Adopting an IT regime had no short or long-run effect, at conventional levels of significance, on domestic investment in 21 out of 29 treated countries; this dominant pattern appears consistent with recent works on rational inattentive behaviour of firms. However, IT induced mainly long-run heterogeneous changes in domestic investment prices in 9 targeters, suggesting that supply constraints external to firms can also weaken the link between IT and domestic investment. Keywords: Domestic investment; Inflation targeting; Treatment effect; Synthetic control method; Rational inattention (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:inteco:v:169:y:2022:i:c:p:98-134 DOI: 10.1016/j.inteco.2021.12.002 Access Statistics for this article International Economics is currently edited by Valerie Mignon and Marcelo Olarreaga More articles in International Economics from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.