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Volume 6 - Number 3 | November 2022

Inflation targeting and economic performance over the crisis: evidence from emerging market economies

Thuy Hang Duong

02/11/2022 125 0 0
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Inflation targeting Global financial crisis Emerging market countries Difference-in-difference approach Fixed model

Abstract:

Purpose
Inflation targeting has increasingly become a popular monetary framework since its first introduction in New Zealand at the beginning of 1990. However, the causality effects of this policy on economic performance, particularly in periods of economic turmoil remain controversial. Thus, this paper re-examines the treatment effect of inflation targeting on two important macro indicators which are inflation rate and output growth with the focus on emerging market economies. The global financial crisis, which is known as the great recession since the last decade, is investigated as an exogenous shock to test for the effectiveness of this popular regime.
Design/methodology/approach
The difference-in-difference approach in the fixed-model is employed for this investigation using a balanced panel data of 54 countries with 15 inflation-targeting countries for the period 2002 to 2010.
Findings
The examination finds that there is no significant difference in terms of the inflation rate and gross domestic product growth over the whole research period between the treatment and control groups. However, the outcome suggests that emerging economies can control the increase in inflation rate when the economy has to cope with the exogenous uncertainties.
Research limitations/implications
This finding indicates important policy implications for central banks in many countries.
Originality/value
Inflation targeting can help emerging countries to reduce an increase in inflation rate in the crisis period without many trade-offs in the growth of output.

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  30. Further reading
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  32. Nagy, L. (2016), “From independent Slovakian Central Bank policy to the monetary policy of the euro area”, Focus: New Central Bank Policies, Public Finance Quarterly 2016/1, pp. 49-64.
  33. Nell, M. (2004), “Monetary policy in the Slovak Republic. Implicit inflation targeting and the choice of an optimal exchange rate regime”, BIATEC, Vol. 12 No. 11, pp. 1-23.
  34. Williard, L. (2012), “Does inflation targeting matter? A reassessment”, Applied Economics, Vol. 44 No. 17, pp. 2231-2244, doi: 10.1080/00036846.2011.564136.

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