Adopting inflation targeting in emerging markets: exploring the factors behind the decision

Stojanovikj, Martin and Petrevski, Goran (2019): Adopting inflation targeting in emerging markets: exploring the factors behind the decision.

Abstract

This paper examines the macroeconomic, financial, and institutional factors which affect the adoption of inflation targeting as a monetary policy strategy. We estimate a panel binary response model for 44 emerging market economies (EMEs) during 1990-2017. The main findings from our empirical investigation suggest that it is inflation and output growth volatility rather than inflation and output which matters for the adoption of IT in EMEs. In addition, we provide evidence that financial development, central bank independence, and capital mobility are associated with higher likelihood to adopt IT, whereas public debt has opposite effects. Finally, we show that, when deciding whether to adopt IT, policy makers take into consideration only medium-term macroeconomic, financial, and institutional conditions, while the longer-run historical performance becomes less relevant in the decision-making process.

• Item Type: MPRA Paper
• Language: English
• Keywords: inflation targeting; binary response models; emerging market economies
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C25 - Discrete Regression and Qualitative Choice Models ; Discrete Regressors ; Proportions ; Probabilities; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

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