Inflation Targeting Regimes in Emerging Market Economies: To Invest or Not to Invest?

Douglas Silveira and Ricardo B. L. M. Oscar ()
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Ricardo B. L. M. Oscar: Federal University of Rio Grande do Sul

Computational Economics, 2024, vol. 64, issue 4, No 7, 2097-2129

Abstract: Abstract We propose a stochastic learning rule through an Agent-based model to understand how emerging market economies (EMEs) can achieve high levels of investment, given the announced inflation target rate. The central banks act as a pseudo-player, choosing between the pursued target inflation rate or a negative inflation rate. By taking this action as given, bounded-rational firms and workers iteratively play a two-population well-mixed evolutionary game to make investment decisions. Our findings show that when inflation converges to its target, the less the central planners’ effort to reach a steady state with investment coordination. When central banks target a negative inflation rate, it can speed up the EMEs’ convergence to a steady-state with agents coordinating their investment strategies. It shed some light on central banks’ transparency and credibility to avoid the so-called debt-deflation spiral, which typically increases the uncertainty in EMEs, limiting the investments in the economy.

Keywords: Agent-based modeling; Inflation targeting; Perfect-foresight and best-response dynamics (search for similar items in EconPapers)
JEL-codes: C62 C73 E22 E52 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10614-023-10513-0

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