Inflation targeting and disinflation costs in emerging market economies

Stojanovikj, Martin and Petrevski, Goran (2020): Inflation targeting and disinflation costs in emerging market economies.

Abstract

In this paper, we study whether adopting Inflation Targeting (IT) in Emerging Market Economies (EMEs) affects the output costs of disinflation, controlling for a number of additional factors. Based on a sample of 170 disinflation episodes in 44 EMEs over the 1970-2017 period, we provide strong evidence that adopting IT is associated with a higher sacrifice ratio in EMEs. In addition, we find that gradual disinflation may be less costly in EMEs. Moreover, we show that trade openness is associated with a lower sacrifice ratio, while both central bank independence (CBI) and external shocks have adverse effects on the sacrifice ratio. Our main findings are robust to alternative classifications of the IT regime, alternative definitions of disinflation episodes, different thresholds for high inflation, different peak levels of trend inflation rate, across various specifications of the empirical model, as well as for both the entire sample and the sub-sample covering the post-1990s period.

• Item Type: MPRA Paper
• Language: English
• Keywords: inflation targeting; sacrifice ratio; disinflation; emerging market economies
• Subjects: 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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