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.
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Notes
The sample consists of the following countries: Argentina, Algeria, Brazil, Botswana, China, Costa Rica, Cote d’Ivoire, Chile, Colombia, Czech Republic, Croatia, Dominican Republic, Ecuador, Egypt, El Salvador, Ghana, Guatemala, Hungary, Israel, Indonesia, India, Jordan, Lebanon, Malaysia, Morocco, Mexico, Nigeria, Pakistan, Panama, Peru, Philippines, Poland, Russia, Serbia, Singapore, South Africa, South Korea, Tanzania, Thailand, Turkey, Tunisia, Uruguay, Ukraine, and Venezuela.
The FE framework is preferred over the random effects (RE) specification because the latter is inappropriate in macro panels. Specifically, RE models would be used if one draws N cross sectional units from a large population and makes inference about the population parameters (Baltagi 2008). Also, RE models impose more restrictive assumptions about the exogeneity of the regressors, including the individual unobserved effects, which do not seem realistic (Greene 2003, Wooldridge 2002).
We prefer not to include time-specific fixed effects in the baseline specification for several reasons: (1) the high collinearity with foreign inflation, which is an important variable in our specification, given that the majority of the EMEs in our sample are small open economies; (2) the presence of foreign inflation variable in the empirical model accounts for at least a part of the common time-specific effects over the sample period; (3) the other variables in the model account for a large part of the same effects that are presumably comprised in the time-specific effects; (4) from a technical standpoint, the introduction of these effects causes underidentification of the model due to the loss in degrees of freedom, i.e., causing insurmountable challenges in estimating the GMM on our almost square panel; (5) the significance of the time-specific effects is expected due to the long time dimension in the dataset.
In addition, we have checked the sensitivity of the results for various subsamples obtained by excluding some countries. The obtained results, which are available upon request, are not substantially different from the ones based on the whole sample.
The following adoption dates of inflation targeting have been modified: Chile: 1999 instead of 1991; Colombia: 1995 instead of 1999; Israel: 1992 instead of 1997; Mexico: 1995 instead of 1999; Peru: 1994 instead of 2002; Philippines: 1995 instead of 2002; Turkey: 2001 instead of 2006; Ghana: 2002 instead of 2007; and Indonesia: 2000 instead of 2005.
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Appendix
Appendix
See Tables 14, 15, 16, 17, 18, 19, 20, 21, 22 and 23.
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Stojanovikj, M., Petrevski, G. Macroeconomic effects of inflation targeting in emerging market economies. Empir Econ 61, 2539–2585 (2021). https://doi.org/10.1007/s00181-020-01987-0
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DOI: https://doi.org/10.1007/s00181-020-01987-0