Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature

Goran Petrevski

Papers from arXiv.org

Abstract: This paper surveys the empirical literature of inflation targeting. The main findings from our review are the following: there is robust empirical evidence that larger and more developed countries are more likely to adopt the IT regime; the introduction of this regime is conditional on previous disinflation, greater exchange rate flexibility, central bank independence, and higher level of financial development; the empirical evidence has failed to provide convincing evidence that IT itself may serve as an effective tool for stabilizing inflation expectations and for reducing inflation persistence; the empirical research focused on advanced economies has failed to provide convincing evidence on the beneficial effects of IT on inflation performance, while there is some evidence that the gains from the IT regime may have been more prevalent in the emerging market economies; there is not convincing evidence that IT is associated with either higher output growth or lower output variability; the empirical research suggests that IT may have differential effects on exchange-rate volatility in advanced economies versus EMEs; although the empirical evidence on the impact of IT on fiscal policy is quite limited, it supports the idea that IT indeed improves fiscal discipline; the empirical support to the proposition that IT is associated with lower disinflation costs seems to be rather weak. Therefore, the accumulated empirical literature implies that IT does not produce superior macroeconomic benefits in comparison with the alternative monetary strategies or, at most, they are quite modest.

Date: 2023-05
New Economics Papers: this item is included in nep-ban, nep-mfd and nep-mon
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Working Paper: Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2305.17474

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