Does inflation targeting lower inflation? If yes, then when?
by Amr Sadek Hosny
International Journal of Monetary Economics and Finance (IJMEF), Vol. 10, No. 3/4, 2017

Abstract: Using a dataset of 170 developing and developed countries over the 1990-2011 period, this paper attempts an answer to the following two questions: (1) Does inflation targeting (IT) work? And (2) When does inflation targeting work? Using various propensity score matching (PSM) techniques, it is shown that IT does have a causal effect on inflation, thus improving on existing literature which mainly used OLS and/or panel methodologies. The more important contribution, however, is that we study the effect of the initial inflation rate on effectiveness of IT. Existing literature has loosely argued that IT would only be effective if initial inflation is low, while country experience suggests that IT is only adopted when initial inflation is high. Using quantile treatment effects, it is shown that IT is more effective in lowering inflation rates when initial inflation is high to begin with.

Online publication date: Tue, 10-Oct-2017

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