, Volume 45, Issue 1, pp 197–213 | Cite as

Performance of inflation targeting in retrospect

  • Nezir Kose
  • Yeliz Yalcin
  • Eray Yucel
Original Paper


Both inflation and inflation expectations declined considerably in the inflation targeting countries during the past two decades. The questions of whether this decline has actually been an outcome of inflation targeting solely and whether inflation targeting has been successful in stabilizing other macroeconomic variables though remain. This study considers these questions on the basis of 16 inflation targeting countries and 21 non-targeting ones using a difference-in-difference approach. With regard to the baseline period of 1996–1999 during which neither of the groups was implementing inflation targeting, a difference-in-difference approach was employed to assess the effects of inflation targeting on inflation, output growth, real exchange rates, inflation volatility and real exchange rate volatility during moving 4-year periods between 2007 and 2015. Our estimates suggest that inflation targeting was superior in terms of harnessing inflation as well as inflation volatility. In terms of economic growth, however, inflation targeting seems to be neutral and in terms of real exchange rates it seems not to be stabilizing, if not de-stabilizing. A hybrid version of inflation targeting, namely the conventional inflation targeting augmented by an improved capacity to deliver macro-prudence as in the post-Lehman economic climate, can therefore be viewed as the best available policy alternative for the upcoming decades.


Inflation targeting Difference-in-difference method Monetary policy Volatility 

JEL Classification

C23 C58 E31 E58 


  1. Ball L, Sheridan N (2005) Does inflation targeting matter? In: Bernanke BS, Woodford M (eds) The inflation-targeting debate. University of Chicago Press, Chicago, pp 249–276Google Scholar
  2. Batini N, Kuttner K, Laxton D (2005) Does inflation targeting work in emerging markets? IMF—World Economic Outlook, Chapter 4Google Scholar
  3. Bernanke BS, Laubach T, Mishkin FS, Posen AS (1999) Inflation targeting: lessons from the international experience. Princeton University Press, PrincetonGoogle Scholar
  4. Blinder AS (1998) Central banking in theory and practice. MIT Press, CambridgeGoogle Scholar
  5. Bruno M (1990) High inflation and the nominal anchors of an open economy. NBER Working Paper Series 3518Google Scholar
  6. Cecchetti SG, Flores-Lagunes A, Krause S (2006) Has monetary policy become more efficient? A cross-country analysis. Econ J 116:408–433CrossRefGoogle Scholar
  7. Dotsey M (2006) A review of inflation targeting in developed countries. Fed Reserve Bank Phila Bus Rev Third Quarter:10–20Google Scholar
  8. Freedman C (2005) Inflation targeting: some history and some issues. In: Presentation at the Central Bank of Turkey, 2 June 2005Google Scholar
  9. Gonçalves CE, Salles JM (2008) Inflation targeting in emerging economies: what do the data say? J Dev Econ 85(1–2):312–318CrossRefGoogle Scholar
  10. Hansen BE (1999) The grid bootstrap and the autoregressive model. Rev Econ Stat 81(4):594–607CrossRefGoogle Scholar
  11. 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):1521–1538CrossRefGoogle Scholar
  12. Kumhof M (2002) A critical view of inflation targeting: crises, limited sustainability and aggregate shocks. In: Loayza N, Soto R (eds) Inflation targeting: design, performance, challenges. Central Bank of Chile, SantiagoGoogle Scholar
  13. Levin AT, Natalucci FM, Piger JM (2004) The macroeconomic effects of inflation targeting. Fed Reserve Bank St. Louis Rev 86(4):51–80Google Scholar
  14. Lin Shu, Ye Haichun (2007) Does inflation targeting really make a difference? Evaluating the treatment effect of inflation targeting in seven industrial countries. J Monet Econ 54(2007):2521–2533CrossRefGoogle Scholar
  15. Lin Shu, Ye Haichun (2009) Does inflation targeting make a difference in developing countries? J Dev Econ 89(2009):118–123CrossRefGoogle Scholar
  16. Mishkin FS, Schmidt-Hebbel K (2007) Does inflation targeting make a difference. In: Mishkin F, Schmidt-Hebbel K (eds) Monetary policy under inflation targeting, vol XI. Banco Central de Chile, Santiago, pp 291–372Google Scholar
  17. Paulin G (2006) Credibility with flexibility: the evolution of inflation-targeting regimes, 1990–2006. Bank Can Rev 2006(Summer):5–18Google Scholar
  18. Roger S (2010) Inflation targeting turns 20. Finance Dev 2010:46–49Google Scholar
  19. Roger S, Restrepo J, Garcia C (2009) Hybrid inflation targeting regimes. IMF Working Paper 09/234Google Scholar
  20. Sherwin M (1999) Inflation targeting: 10 years on. In: Speech to the New Zealand Association of Economists Conference, Reserve Bank of New Zealand, Rotorua, 1 JulyGoogle Scholar
  21. Stock JH (1991) Confidence Intervals for the largest autoregressive root in U.S. macroeconomic time series. J Monet Econ 28(3):435–459CrossRefGoogle Scholar
  22. Svensson LEO (1997) Inflation forecast targeting: implementing and monitoring inflation targets. Eur Econ Rev 41(6):1111–1146CrossRefGoogle Scholar
  23. Svensson LEO (1998) Inflation targeting as a monetary policy rule. NBER Working Paper Series 6790Google Scholar
  24. Svensson LEO, Woodford M (2003) Implementing optimal policy through inflation-forecast targeting. NBER Working Paper Series 9747Google Scholar
  25. Vega M, Winkelried D (2005) Inflation targeting and inflation behavior: a successful story? Int Cent Bank 1(3):153–175Google Scholar

Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Department of EconometricsGazi UniversityAnkaraTurkey
  2. 2.Department of EconomicsOzyegin UniversityIstanbulTurkey

Personalised recommendations