Skip to main content
SpringerLink
Log in

Credibility of inflation targeting: some recent Asian evidence

  • Published:
Economic Change and Restructuring Aims and scope Submit manuscript

“A sharp regime-shift produces credibility,

and hence a shift in expectations that

makes disinflation costless” (Sargent, 1983).

Abstract

Inflation targeting (IT) has been popular in emerging economies despite its early adoption in advanced countries. This paper seeks to find out whether the presence of the IT regime for the Asian countries enhance credibility of the central banks. The study makes use of two episode methods in the calculation of sacrifice ratio for the period 1970–2014 for 13 Asian economies. Empirical findings based on annual data suggest that an IT regime indeed enhances credibility of the central banks. The low sacrifice ratio in IT countries is explained by the implementation of IT regime. The IT policy has potential to reduce sacrifice ratios by 3.7–5.7 points. Among other determinants initial inflation is found to be significant in Asian economies. However, the speed of disinflation remains insignificant irrespective of the method used in the analysis. These findings do not support the idea that IT and speed can be used alternatively as credible monetary policy.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. Dincer and Eichengreen (2008) shows that inflation targeting is more transparent that any other regime such as exchange rate regime etc. Others like Mishkin and Posen (1998), Gurkaynak et al. (2010), Johnson (2002), Levin et al. (2004), Roger and Stone (2005) supported the views.

  2. Several studies like Zhang (2005), Hofstetter (2008), Senda and Smith (2008), Roux and Hofstetter (2014) have found that this method underestimates the disinflation cost by neglecting the persistence effects.

  3. We have excluded one episode of having a highlighter in the series.

  4. The adoption date of IT regime is taken from Bank of England report (Hammond 2012).

References

  • Ball L (1994) What determines the sacrifice ratio? In: Gregory Mankiw N (ed) Monetary policy. The University of Chicago Press, Chicago, pp 155–193

  • Ball LM, Sheridan N (2004) Does inflation targeting matter? In: Bernanke BS, Woodford M (eds) The inflation-targeting debate. University of Chicago Press, Chicago, pp 249–282

  • Ball L, Mankiw NG, Romer D, Akerlof GA, Rose A, Yellen J, Sims CA (1988) The new Keynesian economics and the output-inflation trade-off. Brook Papers Econ Act 1988(1):1–82

    Article  Google Scholar 

  • Batini N, Laxton D (2006) Under what conditions can inflation targeting be adopted?: The experience of emerging markets. (No. w406). Central Bank of Chile, Santiago

    Google Scholar 

  • Belke A, Böing T (2014) Sacrifice ratios for Euro area countries: new evidence on the costs of price stability. Aust Econ Rev 47(4):455–471

    Article  Google Scholar 

  • Bernanke BS, Mishkin FS (1997) Inflation targeting: A new framework for monetary policy? (No. w5893). National Bureau of Economic Research, Cambridge

    Book  Google Scholar 

  • Bernanke BS, Laubach T, Posen AS, Mishkin FS (1999) Inflation targeting: lessons from the international experience. Princeton University Press, Princeton

    Google Scholar 

  • Blanchard OJ, Summers LH (1986) Hysteresis and the European unemployment problem. NBER Macroecon Annu 1:15–78

    Article  Google Scholar 

  • Brito RD (2010) Inflation targeting does not matter: another look at OECD sacrifice ratios. J Money Credit Bank 42(8):1679–1688

    Article  Google Scholar 

  • Cecchetti GS (1994) Comment in monetary policy. The University of Chicago Press, Chicago, pp 188–193

    Google Scholar 

  • Cecchetti SG, Rich RW (2001) Structural estimates of the US sacrifice ratio. J Bus Econ Stat 19(4):416–427

    Article  Google Scholar 

  • Dincer N, Eichengreen B (2008) Central bank transparency: Where, why and with what effects?. Edward Elgar Publishing, In Central Banks as Economic Institutions

    Google Scholar 

  • Durand JJ, Huchet-Bourdon M, Licheron J (2008) Sacrifice ratio dispersion within the Euro zone: What can be learned about implementing a single monetary policy? Int Rev Appl Econ 22(5):601–621

    Article  Google Scholar 

  • Friedman M (1968) The role of monetary policy. Am Econ Rev 58(1):1–17

    Google Scholar 

  • Gali J, Gertler M (1999) Inflation dynamics: a structural econometric analysis. J Monet Econ 44(2):195–222

    Article  Google Scholar 

  • Gali J, Gertler M, Lopez-Salido JD (2001) European inflation dynamics. Eur Econ Rev 45(7):1237–1270

    Article  Google Scholar 

  • Gali J, Gertler M, Lopez-Salido JD (2005) Robustness of the estimates of the hybrid New Keynesian Phillips curve. J Monet Econ 52(6):1107–1118

    Article  Google Scholar 

  • Gemayel MER, Jahan MS, Peter MA (2011) What can low-income countries expect from adopting inflation targeting? (No. 11-276). International Monetary Fund, Washington

    Google Scholar 

  • Goncalves CES, Carvalho A (2009) Inflation targeting matters: evidence from OECD economies’ sacrifice ratios. J Money Credit Bank 41(1):233–243

    Article  Google Scholar 

  • Goncalves CES, Salles JM (2008) Inflation targeting in emerging economies: What do the data say? J Dev Econ 85(1):312–318

    Article  Google Scholar 

  • Gordon RJ, King SR (1982) The output cost of disinflation in traditional and vector autoregressive models. Brook Papers Econ Act 1982(1):205–244

    Article  Google Scholar 

  • Gupta R, Jooste C, Ranjbar O (2017) South Africa’s inflation persistence: a quantile regression framework. Econ Change Restruct 50(4):367–386

    Article  Google Scholar 

  • Gurkaynak RS, Levin A, Swanson E (2010) Does inflation targeting anchor long-run inflation expectations? Evidence from the US, UK, and Sweden. J Eur Econ Assoc 8(6):1208–1242

    Google Scholar 

  • Hallett AH, Libich J (2012) Explicit inflation targets and central bank independence: Friends or foes? Econ Change Restruct 45(4):271–297

    Article  Google Scholar 

  • Hammond G (2012) State of the art of inflation targeting, Handbook No. 29. Centre for Central Banking Studies, Bank of England, London

  • Hofstetter M (2008) Disinflations in Latin America and the Caribbean: A free lunch? J Macroecon 30(1):327–345

    Article  Google Scholar 

  • Johnson DR (2002) The effect of inflation targeting on the behavior of expected inflation: evidence from an 11 country panel. J Monet Econ 49(8):1521–1538

    Article  Google Scholar 

  • Levin AT, Natalucci FM, Piger JM (2004) The macroeconomic effects of inflation targeting. Rev Fed Reserve Bank St Louis 86(4):51–58

    Google Scholar 

  • Lin S, Ye H (2007) Does inflation targeting make a difference? Evaluating the treatment effect of inflation targeting in seven industrial countries. J Monet Econ 54(8):2521–2533

    Article  Google Scholar 

  • Mankiw NG (1991) Macroeconomics. Worth Publishers, New York

    Google Scholar 

  • Mankiw NG (2010) Macroeconomics. Worth Publishers, New York

    Google Scholar 

  • Mazumder S (2014) Determinants of the sacrifice ratio: evidence from OECD and non-OECD countries. Econ Model 40:117–135

    Article  Google Scholar 

  • Mishkin FS (2000) Inflation targeting in emerging market countries. Am Econ Rev 90(2):105–109

    Article  Google Scholar 

  • Mishkin FS, Posen AS (1998) Inflation targeting: lessons from four countries (No. w6126). National Bureau of Economic Research, Cambridge

    Book  Google Scholar 

  • Mishkin FS, Schmidt-Hebbel K (2007) Does inflation targeting make a difference? (No. w12876). National Bureau of Economic Research, Cambridge

    Book  Google Scholar 

  • Okun AM (1978) Efficient disinflationary policies. Am Econ Rev 68(2):348–352

    Google Scholar 

  • Phelps ES (1967) Phillips curves, expectations of inflation and optimal unemployment over time. Economica 34(135):254–281

  • Phillips AW (1958) The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861–1957. Economica 25(100):283–299

    Google Scholar 

  • Roger S, Stone M (2005) On target?: The international experience with achieving inflation targets (No. 05-163). International Monetary Fund, Washington

    Google Scholar 

  • Romer CD, Romer DH (1989) Does monetary policy matter? A new test in the spirit of Friedman and Schwartz. NBER Macroecon Annu 4:121–170

    Article  Google Scholar 

  • Roux ND, Hofstetter M (2014) Sacrifice ratios and inflation targeting: the role of credibility. Int Finance 17(3):381–401

    Article  Google Scholar 

  • Sargent TJ (1983) Stopping moderate inflations: the methods of Poincare and Thatcher. In: Dornbusch R, Simonsen M (eds) Inflation, debt and indexation. MIT Press, Cambridge, pp 54–96

  • Senda T, Smith JK (2008) Inflation history and the sacrifice ratio: episode-specific evidence. Contemp Econ Policy 26(3):409–419

    Article  Google Scholar 

  • Sethi D, Acharya D (2016) Measuring sacrifice ratio by episode method: methodological issues and conflicting results for an emerging market economy. Indian J Econ Bus 15(2):311–318

    Google Scholar 

  • Sethi D, Acharya D (2017) Estimating sectoral disinflation cost in India: some structural VAR evidence. J Quant Econ. https://doi.org/10.1007/s40953-017-0109-0

    Google Scholar 

  • Taylor JB (1983) Union wage settlements during a disinflation. Am Econ Rev 73(5):981–993

    Google Scholar 

  • Vega M, Winkelried D (2005) Inflation targeting and inflation behavior: a successful story. Int J Central Bank 1:153–175

    Google Scholar 

  • Zhang LH (2005) Sacrifice ratios with long-lived effects. Int Finance 8(2):231–262

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. School of Economics, University of Hyderabad, Hyderabad, Telangana, 500046, India

    Dinabandhu Sethi & Debashis Acharya

Authors
  1. Dinabandhu Sethi
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Debashis Acharya
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Dinabandhu Sethi.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Sethi, D., Acharya, D. Credibility of inflation targeting: some recent Asian evidence. Econ Change Restruct 52, 203–219 (2019). https://doi.org/10.1007/s10644-017-9224-3

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10644-017-9224-3

Keywords

JEL Classification

Search

Navigation