Heterogeneous effects of inflation targeting in emerging markets and developing economies

Abstract

<title>Abstract</title> Over the last three decades, several emerging markets and developing economies (EMDEs) have adopted inflation targeting (IT) as their modus operandi of monetary policy. This does not seem to square particularly well with numerous expert warnings regarding institutional inefficiencies in the EMDEs, which in turn threatens the efficacy of the policy in these economies. In this study, we assess the growth effects of IT regime in a worldwide sample of EMDEs over the 1978–2019 window. We circumvent an often-cited econometric problem of “self-selection” bias by exploiting the synthetic control method (SCM) to impute reliable counterfactuals. Our results suggest that, on average, IT regime has spurred macroeconomic performance, as proxied by real GDP per capita, in the targeting EMDEs. Importantly, this finding reinforces the hypothesis that IT regime behaves procyclically in EMDEs. In essence, these results also highlight the fact that concerns over institutional immaturities in EMDEs are inflated and are to a greater extent unsubstantiated. Our analysis has also unearthed substantial heterogeneities in the distribution of IT-induced dividends across geographical regions. In particular, we show that IT adoption has unambiguously positive and higher per capita income effects in Asian and European economies, and to a lesser extent in the Latin America and the Caribbean economies. Meanwhile, of the three IT adopters in Africa, we find that only Ghana realized (robustly) positive growth effects from the regime. JEL classification: C21, C33, E52, O47