Adopting inflation targeting in emerging markets: exploring the factors behind the decision

Martin Stojanovikj and Goran Petrevski

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the macroeconomic, financial, and institutional factors which affect the adoption of inflation targeting as a monetary policy strategy. We estimate a panel binary response model for 44 emerging market economies (EMEs) during 1990-2017. The main findings from our empirical investigation suggest that it is inflation and output growth volatility rather than inflation and output which matters for the adoption of IT in EMEs. In addition, we provide evidence that financial development, central bank independence, and capital mobility are associated with higher likelihood to adopt IT, whereas public debt has opposite effects. Finally, we show that, when deciding whether to adopt IT, policy makers take into consideration only medium-term macroeconomic, financial, and institutional conditions, while the longer-run historical performance becomes less relevant in the decision-making process.

Keywords: inflation targeting; binary response models; emerging market economies (search for similar items in EconPapers)
JEL-codes: C25 E42 E52 E58 (search for similar items in EconPapers)
Date: 2019-12-23, Revised 2020-06-18
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:115797

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