Macro Effects of Formal Adoption of Inflation Targeting

IMF Working Papers, January 13, 2023

Source details

Examines the impact of formal adoption of inflation targeting (IT) on inflation, growth, and anchoring of inflation expectations in advanced economies and emerging markets and developing economies (EMDEs).
Uses country-level analysis including the Synthetic Control Method (SCM) to compare outcomes in IT countries to a synthetic cohort.

Early adopters of IT (pre-2000) all saw declines in inflation rates following adoption.
IT adopters since pre-2000 have enjoyed declines in inflation in only about half the cases.
On average, there is not much difference between IT and non-IT countries in:
- mean inflation,
- inflation volatility,
- the extent of inflation anchoring.
Cannot rule out the possibility that observed success of IT may be due to “regression to the mean.”
SCM country-level results: IT adoption delivers significant inflation gains in about a third of the cases.

Finds limited support for the concern that adoption of IT systematically leads to poorer growth outcomes.

The belief that IT adoption will be sufficient to keep inflation in check cannot be taken for granted, especially at a time when central banks are struggling to control inflation.

Authors: Surjit Bhalla, Karan Bhasin, Prakash Loungani
Date: January 13, 2023
Pages: 31
Volume: 2023
Issue: 007
Series: Working Paper No. 2023/007
DOI: https://doi.org/10.5089/9798400229169.001
Stock No: WPIEA2023007
ISBN: 9798400229169
ISSN: 1018-5941
Subjects / Keywords: Emerging and frontier financial markets, Financial markets, Inflation, Inflation targeting, Monetary policy, Prices; Emerging and frontier financial markets, Global, Inflation, inflation expectation, Inflation expectations, Inflation forecasts, Inflation targeting, inflation volatility, IT adopter, IT adoption, IT country

IMF Working Papers — Macro Effects of Formal Adoption of Inflation Targeting (Working Paper No. 2023/007, January 13, 2023).