Macroeconomic effects of inflation targeting in emerging market economies
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Macroeconomic effects of inflation targeting in emerging market economies Martin Stojanovikj1 · Goran Petrevski2 Received: 6 April 2020 / Accepted: 11 November 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract This paper examines the macroeconomic effects of inflation targeting in 44 emerging market economies (EMEs) during 1970–2017. We estimate a dynamic panel data model, taking into account the endogeneity of the inflation targeting regime and controlling for a variety of factors affecting macroeconomic performance in EMEs. The main findings from our empirical investigation are as follows: First, inflation targeting is associated with lower average inflation, though its favorable effects, as compared to alternative monetary strategies, are negligible; second, we provide firm evidence against the proposition that inflation targeting lowers inflation volatility. Our results are robust with respect to various modifications in the estimation procedure and to the inclusion of additional control variables. Keywords Inflation targeting · Dynamic panel data models · Emerging market economies · General method of moments JEL Classification C23 · E52 · E58
1 Introduction Since the early 1990s, inflation targeting has gained wide acceptance throughout the world as a framework for achieving and maintaining low inflation. The common features of this monetary policy regime, as being implemented in practice, are as follows: price stability as a medium-term objective, short-term flexibility, and central bank independence accompanied by accountability and transparency. According to the pro-
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Goran Petrevski [email protected] Martin Stojanovikj [email protected]
1
Integrated Business Faculty, Skopje, North Macedonia
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Faculty of Economics, Ss. Cyril and Methodius University, Skopje, North Macedonia
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M. Stojanovikj, G. Petrevski
ponents of inflation targeting, its increased popularity is related to its specific design as a framework, not a strict rule. In this regard, inflation targeting can be best described as a rule-like strategy or constrained discretion, which enables the central bank to be focused on price stability, while simultaneously being able to deal with short-run macroeconomic fluctuations (Bernanke and Mishkin 1997). Following the experience of the advanced economies, since the late 1990s, inflation targeting has been increasingly adopted by a vast majority of emerging market economies (EMEs). Inflation targeting has the potential benefit of addressing the dynamic inconsistency problem in these countries. In this regard, Thornton and Vasilakis (2017) show that inflation targeting facilitates the implementation of countercyclical monetary policy in developing countries, majority of which have been previously notorious for implementing procyclical policies. Mishkin and SchmidtHebbel (2007) argue that inflation targeting has had several favorable outcomes in EMEs: It reduced inflation rates, inflation expectations, and inflation persistence; it reduced output volat
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