Inflation Targeting and the Crisis: An Empirical Assessment

de Carvalho Filho, Irineu (2010): Inflation Targeting and the Crisis: An Empirical Assessment.

Abstract

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

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation targeting; economic crisis; monetary policy
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E00 - General

References

Ball L, Sheridan N. Does inflation targeting matter? In: Bernanke B, Woodford M (Eds), The inflation targeting debate. The University of Chicago Press: Chicago; 2005. p. 249-276.

Batini, Nicoletta and Doug Laxton, 2007, “Under What Conditions Can Inflation Targeting Be Adopted? The Experience of Emerging Markets,” In: Mishkin F. and Schmidt-Hebbel, K. (Eds.), Monetary Policy Under Inflation Targeting, Central Bank of Chile: Santiago, pp. 1-38.

Blanchard, Olivier and Jordi Galí, 2007, “Real Wage Rigidities and the New Keynesian Model,” Journal of Money, Credit and Banking, Supplement to Vol. 39, No. 1 (February 2007), pp. 35-65.

Blanchard, Olivier, 2009, “The Crisis: Basic Mechanisms and Appropriate Policies,” IMF Working Paper 09/80.

Blanchard, Olivier and Hamid Faruqee, 2010, “The Impact Effect of the Crisis on Emerging Market Countries,” mimeo.

Brito, Ricardo D. and Brianne Bystedt, 2009, “Inflation Targeting in Emerging Economies: Panel Evidence,” Journal of Development Economics, forthcoming.

Broda, Christian, 2004, “Terms of Trade and Exchange Rate Regimes in Developing Countries,” Journal of International Economics, vol. 63, pp. 31-58.

Buiter, Willem, 2009, “The Unfortunate Uselessness of Most ’State of the Art’ Academic Monetary Economics,” in http://www.voxeu.org/index.php?q=node/3210

Calvo, Guillermo A. and Carmen M. Reinhart, 2002, “Fear of Floating,” Quarterly Journal of Economics, v. 107(2,May), pp. 379-408.

Decressin, Jorg and Douglas Laxton, 2009, “Gauging Risks for Deflation,” IMF Staff Position Note, SPN/09/01.

Ghosh, Atish R., Marcos Chamon, Christopher Crowe, Jun I. Kim, and Jonathan D. Ostry, 2009, “Coping with the Crisis: Policy Options for Emerging Market Countries,” IMF Staff Position Note 09/08.

Gonçalves, Carlos Eduardo and João Salles, 2008, “Inflation Targeting in Emerging Economies: What Do the Data Say?” Journal of Development Economics, vol. 85, pp. 312-318.

Edwards, Sebastian and Eduardo Levy Yeyati, 2005, “Flexible exchange rates as shock absorbers,” European Economic Review, vol. 49, pp. 2079-2105.

Friedman, Charles and Douglas Laxton, 2009, “Why inflation targeting?” IMF Working Paper 09/86.

Habermeier , Karl, İnci Ötker-Robe, Luis Jacome, Alessandro Giustiniani, Kotaro Ishi, David Vávra, Turgut Kışınbay, and Francisco Vazquez, 2009, “Inflation Pressures and Monetary Policy Options in Emerging and Developing Countries: A Cross Regional Perspective,” IMF Working Paper WP/09/1.

Eggertsson, Gauti and Michael Woodford, 2003, “The Zero Bound on Interest Rates and Optimal Monetary Policy,” Brookings Papers on Economic Activity, Vol. 2003, No. 1 (2003), pp. 139-211.

Mendoza, E.G., 1995, “The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations,” International Economic Review, vol. 36, pp. 101-137.

Roger, Scott, 2009, “Inflation Targeting at 20: Achievements and Challenges,” IMF Working Paper 09/236.

Romer, David, 2006, “Advanced Macroeconomics”, McGraw-Hill: Irwin, New York.

Stiglitz, Joseph, 2008, “The Failure of Inflation Targeting,” in http://www.voxeu.org/index.php?q=node/2549

Stone, Mark, Scott Roger, Seiichi Shimizu, Anna Nordstrom, Turgut Kisinbay, and Jorge Restrepo, 2009, IMF Occasional Paper 267, mimeo.