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

Roberto Duncan, Enrique Martínez García () and Patricia Toledo

No 418, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper introduces novel measures to assess the effectiveness of inflation targeting (IT) and examines its performance across a broad sample of advanced economies (AEs) and emerging market and developing economies (EMDEs). Utilizing synthetic control methods, the study reveals heterogeneous effects of IT on inflation. The results indicate modest reductions in inflation levels, with greater gains observed in EMDEs compared to AEs. Statistically significant reductions are found in approximately one-third of the countries. However, nearly half of the economies experienced substantial improvements in stabilizing inflation near target levels under IT, relative to estimated counterfactual scenarios. IT also enhances economic resilience cushioning inflation from large external shocks, particularly during the 2007-09 Global Financial Crisis, with statistically significant gains observed in two-thirds of EMDEs. Additionally, the effectiveness of IT—both in shifting inflation levels and maintaining stability around target—is significantly correlated with indices of exchange rate stability and monetary policy independence, especially in EMDEs. These findings suggest that the performance of IT regimes is subject to the constraints imposed by the impossibility trilemma of international finance.

Keywords: Inflation targeting; Monetary policy; Inflation; synthetic control method (search for similar items in EconPapers)
JEL-codes: C33 E31 E42 E52 E58 E61 N10 (search for similar items in EconPapers)
Pages: 79
Date: 2022-11-05, Revised 2024-08-22
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:95090

DOI: 10.24149/gwp418r1

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