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Credibility of inflation targeting: some recent Asian evidence

Dinabandhu Sethi () and Debashis Acharya ()
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Dinabandhu Sethi: University of Hyderabad

Economic Change and Restructuring, 2019, vol. 52, issue 3, No 2, 203-219

Abstract: Abstract Inflation targeting (IT) has been popular in emerging economies despite its early adoption in advanced countries. This paper seeks to find out whether the presence of the IT regime for the Asian countries enhance credibility of the central banks. The study makes use of two episode methods in the calculation of sacrifice ratio for the period 1970–2014 for 13 Asian economies. Empirical findings based on annual data suggest that an IT regime indeed enhances credibility of the central banks. The low sacrifice ratio in IT countries is explained by the implementation of IT regime. The IT policy has potential to reduce sacrifice ratios by 3.7–5.7 points. Among other determinants initial inflation is found to be significant in Asian economies. However, the speed of disinflation remains insignificant irrespective of the method used in the analysis. These findings do not support the idea that IT and speed can be used alternatively as credible monetary policy.

Keywords: Disinflation policy; Sacrifice ratio; Episode method; Inflation targeting (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s10644-017-9224-3

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