Volume 6 - Number 3 | November

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

Thuy Hang Duong


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.
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.
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.
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.


  1. Armand, A. (2012), Coping with the Recent Financial Crisis, Did Inflation Targeting Making Any Difference?, University of Orléans, Rue de Blois.
  2. Ball, M. and Sheridan, N. (2004), Does Inflation Targeting Matter?, National Bureau of Economic Research, University of Chicago Press, Chicago, pp. 249-282, doi: 10.7208/chicago/9780226044736.003.0007.
  3. Batini, N. and Laxton, D. (2007), “Under what conditions can inflation targeting be adopted? The experience of emerging markets”, in Miskin, F. and Schmidt-Hebbel, K. (Eds), Monetary Policy under Inflation Targeting, Central Bank of Chile, pp. 1-38.
  4. Bernanke, S. and Miskin, S. (1997), “Inflation targeting: a new framework for monetary policy?”, Journal of Economic Perspective, Vol. 11 No. 2, pp. 97-116, doi: 10.1257/jep.11.2.97.
  5. Bjørnland, H.C. (2004), “The role of the exchange rate as a shock absorber in a small open economy”, Open Economies Review, Vol. 15 No. 1, pp. 23-43, doi: 10.1023/B:OPEN.0000009423.30895.fe.
  6. Blinder, S., Ehrmann, M., Fratzscher, M., De Hann, J. and Jansen, D. (2008), “Central bank communication and monetary policy: a survey of theory and evidence”, Working Paper No.13932, NBER. doi: 10.3386/w13932.
  7. Claessens, S., Aruccia, G., Igan, D. and Laeven, L. (2010), “Cross-country experiences and policy implications from the global financial crisis”, Economic Policy, Vol. 25 No. 62, pp. 267-293, doi: 10.1111/j.1468-0327.2010.00244.x.
  8. de Carvalho Filho, I. (2010), “Inflation targeting and the crisis: an empirical assessment”, Working Paper, No.10/45, IMF, pp. 1-22. doi: 10.5089/9781451963045.001.
  9. Edwards, S. and Yeyati, L. (2005), “Flexible exchange rates as shock absorbers”, European Economic Review, Vol. 49 No. 8, pp. 2079-2105, doi: 10.1016/j.euroecorev.2004.07.002.
  10. FTSE Russell (2020), “Equity country classification”, FTSE, available at: https://www.ftserussell.com/equity-country-classification (accessed 12 October 2020).
  11. Gemayel, R., Jahan, S. and Peter, A. (2011), “What can low-income countries expect from adopting inflation targeting?”, Working Paper WP/11/276, IMF. doi: 10.5089/9781463925932.001.
  12. Gonçalves, S. and Salles, M. (2006), “Inflation targeting in emerging economies: what do the data say?”, Journal of Development Economics, Vol. 85 Nos 1-2, pp. 312-318, doi: 10.1016/j.jdeveco.2006.07.002.
  13. International Monetary Fund (2005, 2008), (2010), World Economic Outlook, International Monetary Fund, Washington, Distict of Columbia.
  14. International Monetary Fund (2019), Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), International Monetary Fund, Washington, District of Columbia.
  15. Khandker, R., Koolwal, B. and Samad, A. (2010), Handbook on Impact Evaluation: Quantitative Methods and Practices, The World Bank, Washington, District of Columbia. doi: 10.1596/978-0-8213-8028-4.
  16. Lin, S. and Ye, H. (2007), “Does inflation targeting really make a difference? Evaluating the treatment effect of inflation targeting in seven industrial countries”, Journal of Monetary Economics, Vol. 54 No. 8, pp. 2521-2533, doi: 10.1016/j.jmoneco.2007.06.017.
  17. Lin, S. and Ye, H. (2009), “Does inflation targeting make a difference in developing countries?”, Journal of Development Economics, Vol. 89 No. 1, pp. 118-123, doi: 10.1016/j.jdeveco.2008.04.006.
  18. Lucotte, Y. (2012), “Adoption of inflation targeting and tax revenue performance in emerging market economies: an empirical investigation”, Economic Systems, Vol. 36 No. 4, pp. 609-628, doi: 10.1016/j.ecosys.2012.01.001.
  19. Miskin, S. and Schimidt-Hebbel, K. (2007), “Does inflation targeting make a difference?”, Working Paper No.12876, NBER. doi: 10.3386/w12876.
  20. Neumann, M. and Von Hagen, J. (2002), “Does inflation targeting matter?”, Working Paper, B 01-2002, ZEI. doi: 10.20955/r.84.127-148.
  21. Roger, S. (2010), “Inflation targeting turns 20”, Finance and Development, Vol. 47 No. 1, pp. 46-49.
  22. Rose, A. (2007), “A stable international monetary system emerges: inflation targeting is Bretton woods, reserved”, Journal of International Money and Finance, Vol. 26 No. 5, pp. 663-681, doi: 10.1016/j.jimonfin.2007.04.004.
  23. Samarina, A., Terpstra, M. and De Hann, J. (2014), “Inflation targeting and inflation performance: a comparative analysis”, Applied Economics, Vol. 46 No. 1, pp. 41-56, doi: 10.1080/00036846.2013.829205.
  24. Schaechter, A., Stone, R. and Zelmer, M. (2000), Adopting Inflation Targeting: Practical Issues for Emerging Market Countries, International Monetary Fund, Publication Services, Washington, District of Columbia.
  25. Stiglitz, J.E. (2008), The Failure of Inflation Targeting, Project Syndicate, available at: https://www.project-syndicate.org/commentary/the-failure-of-inflation-targeting.
  26. Svensson, L.E.O. (1997), “Inflation targeting in an open economy: strict or flexible inflation targeting”, Reserve Bank of New Zealand Discussion Paper Series G97/8, Reserve Bank of New Zealand.
  27. Tapsoba, R. (2010), “Does inflation targeting improve fiscal discipline? An empirical investigation”, Working Papers 201020, CERDI.
  28. Vega, M. and Winkelried, D. (2005), “Inflation targeting and inflation behavior: a successful story?”, International Journal of Central Banking, Vol. 1 No. 3, pp. 153-175.
  29. Wing, C., Simon, K. and Bello-Gomez, A. (2018), “Designing difference in difference studies: best practices for public health policy research”, Annual Review of Public Health, Vol. 39, pp. 453-469, doi: 10.1146/annurev-publhealth-040617-013507.
  30. Further reading
  31. Central Bank News (2020), Inflation Target, CentralBankNews.info. available at: http://www.centralbanknews.info/p/inflation-targets.html (accessed 12 October 2020).
  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.