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

Abstract

PurposeInflation 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/approachThe 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.FindingsThe 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/implicationsThis finding indicates important policy implications for central banks in many countries.Originality/valueInflation 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.