Inflation Targeting and the Crisis: An Empirical Assessment

IMF Working Papers, February 1, 2010

Source details

Paper appraises how countries with inflation targeting (IT) fared during the current crisis, with the goal of establishing the stylized facts that will guide and motivate future research.
Main distilled findings:
- Since August 2008, IT countries lowered nominal policy rates by more and this loosening translated into an even larger differential in real interest rates relative to other countries.
- IT countries were less likely to face deflation scares.
- IT countries saw sharp real depreciations not associated with a greater perception of risk by markets.
- Some weak evidence that IT countries did better on unemployment rates.
- Advanced IT countries have had relatively stronger industrial production performance.
- Advanced IT countries had higher GDP growth rates than their non-IT peers; no such difference found for emerging countries or the full sample.

Timeframe reference: since August 2008.
Monetary policy reaction:
- IT countries lowered nominal policy rates by more (relative comparison to non-IT peers).
- Loosening led to a larger differential in real interest rates relative to other countries.
Inflation and risk outcomes:
- IT countries were less likely to experience deflation scares.
- Sharp real depreciations in IT countries occurred without a greater perception of risk by markets.
Real economy outcomes:
- Weak evidence of better unemployment-rate performance in IT countries.
- Advanced IT countries: relatively stronger industrial production performance.
- Advanced IT countries: higher GDP growth rates than their non-IT peers.
- No GDP growth difference found for emerging countries or for the full sample.