Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation

Lucotte, Yannick (2010): Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation.

Abstract

Inflation targeting is a monetary policy framework which was adopted by several emerging countries over the last decade. Previous empirical studies suggest that inflation targeting has significant effects on either inflation or inflation variability in emerging targeting countries. But, by reinforcing the disinflation process and so, by reducing drastically seigniorage revenue, the adoption of this monetary policy framework could also affect the design of fiscal policy. In a recent paper, Minea and Villieu (2009a) show theoretically that inflation targeting provides an incentive for governments to improve institutional quality in order to enhance tax revenue performance. In this paper, we test this theoretical prediction by investigating whether the adoption of inflation targeting affects the fiscal effort in emerging markets economies. Using propensity score matching methodology, we evaluate the “treatment effect” of inflation targeting on fiscal mobilization in thirteen emerging countries that have adopted this monetary policy framework by the end of 2004. Our results show that, on average, inflation targeting has a significant positive effect on public revenue collection.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation targetingk; Public revenue; Treatment effect; Propensity score matching; Emerging countries.
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; H - Public Economics > H2 - Taxation, Subsidies, and Revenue

References

Amato, J.D., Gerlach, S., 2002. Inflation targeting in emerging market and transition economies: Lessons after a decade. European Economic Review 46 (4-5), 781-790.

Armas, A., Grippa, F., 2006. Inflation targeting in a dollarized economy: The Peruvian experience, in: Armas, A., Ize, A., Levy Yeyati, E. (Eds.), Financial Dollarization: The Policy Agenda. Palgrave Macmillan, New York, pp. 115-138.

Ball, L., Sheridan, N., 2003. Does inflation targeting matter? NBER Working Paper No. 9577, Cambridge, Massachusetts.

Batini, N., Laxton, D., 2006. Under what conditions can inflation targeting be adopted? The experience of emerging markets. Central Bank of Chile Working Paper No. 406.

Bernanke, B.S., Laubach, T., Mishkin, F.S., Posen, A.S., 1999. Inflation targeting: Lessons from the international experience. Princeton University Press.

Brito, R.D., Bystedt, B., 2010. Inflation targeting in emerging economies: Panel evidence. Journal of Development Economics 91 (2), 198-210.

Brodaty, T., Crépon, B., Fougère, D., 2007. Les méthodes micro-économétriques d’évaluation et leurs applications aux politiques actives d’emploi. Economie et prévision 177 (1), 93-118.

Caliendo, M., Kopeinig, S., 2007. Some practical guidance for the implementation of propensity score matching. Journal of Economic Surveys 22 (1), 31-72.

Carare, A., Schaechter, A., Stone, M., 2002. Establishing initial conditions in support of inflation targeting. IMF Working Paper 02/102.

Castellani, F., Debrun, X., 2001. Central bank independence and the design of fiscal institutions. IMF Working Paper 01/205.

Chambas, G., 2005. Afrique au Sud du Sahara: Mobiliser des ressources fiscales pour le développement. Economica.

Cukierman, A., Edwards, S., Tabellini, G., 1992. Seigniorage and political instability. American Economic Review 82 (3), 537-555.

Dehejia, R., Wahba, S., 1999. Causal effects in non-experimental studies: Re-evaluating the evaluation of training programs. Journal of the American Statistical Association 94, 1053-1062.

Dreher, A., Sturm, J.E., De Haan, J., 2008. Does high inflation causes central bankers lose their job? Evidence based on a new dataset. European Journal of Political Economy 24 (4), 778-787.

Ehrhart, H., 2009. Assessing the relationship between democracy and domestic taxes in developing countries. Etudes et Documents E 2009.30, Centre d’Etudes et de Recherches sur le Développement International.

Ehrhart, H., Minea, A., Villieu, P., 2009. Deficit, seigniorage and the growth Laffer curve in developing countries, Etudes et Documents E 2009.26, Centre d’Etudes et de Recherches sur le Développement International. 23

Faust, J., Henderson, D.W., 2004. Is inflation targeting best-practice monetary policy? Federal Reserve Bank of St. Louis Review 86 (4), 117-143.

Fraga, A., Goldfajn, I., Minella, A., 2003. Inflation targeting in emerging market economies. NBER Working Paper No. 10019, Cambridge, Massachusetts.

Gerlach, S., 1999. Who targets inflation explicitly? European Economic Review 43 (7), 1257-1277.

Gupta, A.S., 2007. Determinants of tax revenue efforts in developing countries. IMF Working Paper 07/184.

Heckman, J.J., Lalonde, R., Smith, J., 1999. The economics and econometrics of active labor market programs, in: Ashenfelter, O., Card, D. (Eds.), Handbook of Labor Economics, vol. 3. Amsterdam, North-Holland, pp. 1865-2097.

Heckman, J.J., Ichimura, H., Todd, P., 1998. Matching as an econometric evaluation estimator. Review of Economic Studies 65 (2), 261-294.

Huang, H., Wei, S-J., 2006. Monetary policies for developing countries: The role of institutional quality. Journal of International Economics 70 (1), 239-252.

Joyce, P.J., Nabar, M. 2009. Sudden stops, banking crises and investment collapses in emerging markets. Journal of Development Economics 90 (2), 314-322.

Khandker, S.R., Koolwal, G.B., Samad, H.A., 2010. Handbook on impact evaluation: Quantitative methods and practices. The World Bank, Washington D.C.

Leuven, E., Sianesi, B., 2003. PSMATCH2: Stata module to perform full Mahalanobis and propensity score matching, common support graphing, and covariate imbalance testing. Available at http://ideas.repec.org/c/boc/bocode/s432001.html.

Levya, G., 2008. The choice of inflation targeting. Central Bank of Chile Working Paper No. 475.

Lin, S., Ye, H., 2009. Does inflation targeting make a difference in developing countries? Journal of Development Economics 89 (1), 118-123.

Lin, S., Ye, H., 2007. Does inflation targeting really make a difference? Evaluating the treatment effect of inflation targeting in seven industrial countries, Journal of Monetary Economics 54 (8), 2521-2533.

Lucotte, Y., 2009. Central bank independence and budget deficits in developing countries: New evidence from panel data analysis. Document de Recherche du LEO No. 2009-19.

Masciandaro, D., Tabellini, G., 1987. Monetary regimes and fiscal deficits: A comparative analysis, in: Cheng, H.S. (Ed.), Monetary Policy in Pacific Basin Countries. Dordrecht: Kluwer, pp. 125-152.

Masson, P.R., Savastano, M.A., Sharma, S., 1997. The scope for inflation targeting in developing countries. IMF Working Paper 97/130. 24

Minea, A., Villieu, P., 2009a. Can inflation targeting promote institutional quality in developing countries? The 26th Symposium on Money, Banking and Finance, University of Orléans, 25-26 June 2009.

Minea, A., Villieu, P., 2009b. Threshold effects in monetary and fiscal policies in a growth model: Assessing the importance of the financial system. Journal of Macroeconomics 31 (2), 304-319.

Mishkin, F.S., 2000. Inflation targeting in emerging-market countries. American Economic Review 90 (2), 105-109.

Mishkin, F.S., Schmidt-Hebbel, K., 2007. Does inflation targeting make a difference? NBER Working Paper No. 12876, Cambridge, Massachusetts.

Montiel, P.J., 2003. Macroeconomics in emerging markets. Cambridge University Press, Cambridge, UK.

Pétursson, T., 2004. Formulation of inflation targeting around the world. Monetary Bulletin 2004/1, Central Bank of Iceland, 57-84.

Reinhart, C.S., Rogoff, K.S., 2004. The modern history of exchange rate arrangements: A reinterpretation. The Quarterly Journal of Economics 119 (1), 1-48.

Rosenbaum, P., Rubin, D., 1983. The central role of the propensity score in observational studies for causal effects. Biometrika 70 (1), 41-55.

Rubin, D., 2007. The design versus the analysis of observational studies for causal effects: Parallels with the design of randomized trials. Statistics in Medicine 26 (1), 20-36.

Rubin, D., 1974. Estimating causal effects of treatments in randomized and non randomized studies. Journal of Educational Psychology 66 (5), 688-701.

Tanzi, V., 1992. Structural factors and tax revenue in developing countries: A decade of evidence, in: Goldin, I., Winters, A. (Eds.), Open Economies: Structural Adjustment and Agriculture. Cambridge University Press, Cambridge, UK, pp. 267-281.

Vega, M., Winkelried, D., 2005. Inflation targeting and inflation behavior: A successful story? International Journal of Central Banking 1 (3), 153-175.

World Bank, 2008. World Development Indicators, CD-Rom. The World Bank, Washington D.C.

World Economic Outlook, 2001. International Monetary Fund. May.