Do Actions Speak Louder Than Words? Assessing the Effects of Inflation Targeting Track Records on Macroeconomic Performance

IMF Working Papers, November 11, 2022

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Canonical URL: Do Actions Speak Louder Than Words? Assessing the Effects of Inflation Targeting Track Records on Macroeconomic Performance

Inflation Targeting (IT) has become a prevalent monetary policy framework in the past three decades, with more central banks adopting and maintaining price stability as their primary monetary policy mandate.
Using a dataset of 68 major advanced countries and emerging markets economies, this paper evaluates the effects of inflation targeting countries’ track records on their macroeconomic performance, measured by real GDP growth and CPI inflation.
The paper constructs three novel inflation targeting track record measures and establishes stylized facts on heterogeneity in IT countries’ management of inflation relative to stated objectives.
Key empirical conclusion: Results from the dynamic panel and local projection regressions suggest that better IT track records do not lead to superior growth and inflation rates in the short term.

Constructs three novel inflation targeting track record measures (measures not enumerated on the landing page).
Documents that most targeters conduct dynamic inflation targeting by frequently updating inflation target bands.
Finds that inflation target band sizes are wide-ranging across IT countries.
Highlights heterogeneity in IT countries’ tendency in managing inflation with respect to their stated objectives.

Sample: 68 major advanced countries and emerging markets economies.
Outcomes analyzed: real GDP growth and CPI inflation.
Methods: dynamic panel regressions and local projection regressions.
Main empirical finding: better IT track records do not lead to superior growth and inflation rates in the short term.

Subjects: Commodity price fluctuations; Foreign exchange; Inflation; Inflation targeting; Monetary policy; Monetary policy frameworks; Nominal effective exchange rate; Prices.
Keywords: better IT; Commodity price fluctuations; countries' track records; dynamic target points and ranges; economic growth and inflation.; effects of inflation targeting track records; Global; Inflation; inflation target band; inflation targeting; Monetary policy frameworks; Nominal effective exchange rate; novel inflation targeting track record measure; track records.