Performance of inflation targeting in retrospect

Nezir Kose, Yeliz Yalcin and Mustafa Yücel

Empirica, 2018, vol. 45, issue 1, No 10, 197-213

Abstract: Abstract Both inflation and inflation expectations declined considerably in the inflation targeting countries during the past two decades. The questions of whether this decline has actually been an outcome of inflation targeting solely and whether inflation targeting has been successful in stabilizing other macroeconomic variables though remain. This study considers these questions on the basis of 16 inflation targeting countries and 21 non-targeting ones using a difference-in-difference approach. With regard to the baseline period of 1996–1999 during which neither of the groups was implementing inflation targeting, a difference-in-difference approach was employed to assess the effects of inflation targeting on inflation, output growth, real exchange rates, inflation volatility and real exchange rate volatility during moving 4-year periods between 2007 and 2015. Our estimates suggest that inflation targeting was superior in terms of harnessing inflation as well as inflation volatility. In terms of economic growth, however, inflation targeting seems to be neutral and in terms of real exchange rates it seems not to be stabilizing, if not de-stabilizing. A hybrid version of inflation targeting, namely the conventional inflation targeting augmented by an improved capacity to deliver macro-prudence as in the post-Lehman economic climate, can therefore be viewed as the best available policy alternative for the upcoming decades.

Keywords: Inflation targeting; Difference-in-difference method; Monetary policy; Volatility (search for similar items in EconPapers)
JEL-codes: C23 C58 E31 E58 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (7)

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DOI: 10.1007/s10663-016-9357-z

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