Just Do it? An Assessment of Inflation Targeting in a Global Comparative Case Study

Abstract

This paper proposes new measures of the effectiveness of inflation targeting (IT) and evaluates its main drivers in a (large) sample of advanced economies (AEs) and emerging market and developing economies (EMDEs). Using synthetic control methods, we find that IT has heterogeneous effects on inflation across countries. The gains shifting the level of inflation (generally downwards) are modest and smaller in AEs than are those in EMDEs. All such gains are statistically significant in one out of three economies approximately. Second, statistically significant differences in keeping inflation close to target under IT (compared with estimated counterfactuals) can be detected more broadly in nearly half of the economies. Third, IT can be a source of economic resilience that helped cushion inflation fluctuations during the 2007-09 Global Financial Crisis with statistically significant gains mostly found among EMDEs (in two out of three of these economies). Finally, we find that IT effectiveness—measured by the dynamic treatment effect and the absolute deviations of both observed and synthetic inflation from target—is significantly correlated with indices of exchange rate stability and monetary policy independence, especially among EMDEs.

Keywords: Inflation targeting, Monetary policy, Inflation, synthetic control method

JEL Classification: C33, E31, E42, E52, E58, E61, N10