What is it about?
In this paper, we study whether adopting inflation targeting in emerging market economies affects the output costs of disinflation, controlling for a number of additional factors. Based on a sample of 40 emerging market economies during 1990-2017, we provide evidence that adopting inflation targeting is not associated with lower sacrifice ratios in emerging market economies.
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Why is it important?
We provide robust evidence that both IT and other monetary regimes are associated with similar sacrifice ratios in EMEs, thus, challenging the proposition that adopting IT in EMEs may result in lower output costs during disinflation episodes. Although we find that IT is not associated with lower disinflation costs in EMEs, we do not interpret our results as invalidating IT as a framework for conducting monetary policy. Instead, our empirical evidence only implies that IT may not be superior to other monetary regimes during the disinflation periods, when the central bank attempts to bring inflation down to the long-term inflation target.
Perspectives
It is interesting to note that, despite the global popularity of inflation targeting regime, its superiority over the alternative monetary regimes does not have strong empirical support. Our paper adds another piece of evidence on this issue by showing that inflation targeting, due to its assumed beneficial impact on inflation expectations, does not provide less costly disinflation in emerging market economies.
Goran Petrevski
Saints Cyril and Methodius University in Skopje
Read the Original
This page is a summary of: Inflation targeting and disinflation costs in Emerging Market economies, Empirica, November 2023, Springer Science + Business Media,
DOI: 10.1007/s10663-023-09598-5.
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