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Inflation Targeting and Banking System Soundness: A Comprehensive Analysis

Author

Listed:
  • Dimas M. Fazio
  • Benjamin M. Tabak
  • Daniel O. Cajueiro
Abstract
Several specialists and authorities blame inflation targeting (IT) regime for not responding to the increasing systemic risk and the development of asset bubbles. Nevertheless, we employ a database with commercial banks from 71 countries between 1998 and 2012, and we present evidence that: banks from IT countries: (i) are, on average, more stable; (ii) have sounder systemically important banks; and (iii) are less affected in times of global liquidity shortage. These results are in line with the existence of a price stability channel towards financial stability. Our conclusions are robust to whether we compare banks from countries that have the same legal origins, whether we control for the responsibility of bank supervision being delegated to other bodies rather than the Central Bank.

Suggested Citation

  • Dimas M. Fazio & Benjamin M. Tabak & Daniel O. Cajueiro, 2014. "Inflation Targeting and Banking System Soundness: A Comprehensive Analysis," Working Papers Series 347, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:347
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    File URL: https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/wps347.pdf
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    References listed on IDEAS

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    Cited by:

    1. Adel Bogari, 2020. "Revisiting the Nexus Between Inflation Targeting and the Build-Up of the Financial Imbalances," Applied Economics and Finance, Redfame publishing, vol. 7(2), pages 85-95, March.

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