Macro Effects of Formal Adoption of Inflation Targeting

Surjit Bhalla, Karan Bhasin and Prakash Loungani

No 2023/007, IMF Working Papers from International Monetary Fund

Abstract: We examine the impact of formal adoption of inflation targeting (IT) on inflation, growth and anchoring of inflation expectations in advanced economies and emerging markets and developing economies (EMDEs). Our paper reports several findings relevant to assessing the success of IT regimes. We find that while the early adopters of IT (pre-2000) all saw declines in inflation rates following adoption, IT adopters since then have enjoyed such success in only about half the cases. Since there is not much difference, on average, between IT and non-IT countries in mean inflation, inflation volatility and the extent of inflation anchoring, it is not easy to sort out what role IT has played in ensuring good outcomes; in particular, we cannot rule out the possibility that the success of IT may be due to ‘regression to the mean’. Our country-level analysis—using the Synthetic Control Method (SCM) to compare outcomes in IT countries to a synthetic cohort—shows that IT adoption delivers significant inflation gains in about a third of the cases. At the same time, we also find limited support for the concern that adoption of IT systematically leads to poorer growth outcomes. At a time when central banks are struggling to keep inflation in check, our results suggest that the belief that IT adoption will be sufficient to achieve this goal cannot be taken for granted.

Keywords: Inflation targeting; Inflation expectations; Inflation forecasts; IT adoption; inflation volatility; IT country; IT adopter; inflation expectation; Inflation; Emerging and frontier financial markets; Global (search for similar items in EconPapers)
Pages: 31
Date: 2023-01-13
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg and nep-mon
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