On the Effectiveness of Inflation Targeting: Evidence from a Semiparametric Approach

Ardakani, Omid and Kishor, Kundan and Song, Suyong (2015): On the Effectiveness of Inflation Targeting: Evidence from a Semiparametric Approach.

Abstract

This paper estimates the treatment effect of inflation targeting for all explicit inflation targeting countries by taking into account the problem of model misspecification and inconsistent estimation of parametric propensity scores by using a semiparametric single index method. In addition, our study uses a broader set of preconditions for inflation targeting and macroeconomic outcome variables than the existing literature. Overall our results suggest no significant difference in level of inflation and inflation volatility in targeters versus non-targeters after the adoption of inflation targeting. Unlike parametric and non-parametric method, we find that inflation targeting leads to a significant decline in the sacrifice ratio and interest rate volatility in developed economies. The results suggest that inflation targeting framework enhances fiscal discipline in both industrial and developing countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation Targeting, Propensity Score, Treatment Effects, Sieve Estimator, Single Index Model.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C21 - Cross-Sectional Models ; Spatial Models ; Treatment Effect Models ; Quantile Regressions; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit

References

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

Angeriz, A., and P. Arestis. 2007. “Assessing the performance of ‘inflation targeting lite’ countries.” The World Economy, 30(11): 1621–1645.

Ball, L., and N. Sheridan. 2003. “Does inflation targeting matter?” The Inflation Targeting Debate. University of Chicago Press.

Bernanke, B., and M. Woodford. 2005. The Inflation-Targeting debate. Vol. 32, Chicago and London:University of Chicago Press.

Brito, R. 2010. “Inflation targeting does not matter: another look at OECD sacrifice ratios.” Journal of Money, Credit, and Banking, 42(8): 1679–1688.

Buuren, S., and K. Groothuis-Oudshoorn. 2011. “MICE: Multivariate imputation by chained equations in R.” Journal of Statistical Software, 45(3).

Chadha, J. S., and C. Nolan. 2001. “Inflation targeting, transparency and interest rate volatility: ditching ‘monetary mystique’ in the UK.” Journal of Macroeconomics, 23: 349–366.

Creel, J., and P. Hubert. 2010. “Has inflation targeting changed the conduct of monetary policy?” Macroeconomic Dynamics, FirstView: 1–21.

Dehejia, R. H., and S. Wahba. 2002. “Propensity score-matching methods for nonexperimental causal studies.” The Review of Economics and Statistics, 84: 151–161.

de Mendonca, H. F., and G. J. de Guimaraes. 2012. “Is inflation targeting a good remedy to control inflation?” Journal of Development Economics, 98(2): 178–191.

Demertzis, M., and A. H. Hallett. 2007. “Central bank transparency in theory and practice.” Journal of Macroeconomics, 29(4): 760–789.

Edwards, S. 2006. “The relatioship between exchange rates and inflation targeting revisited.” National Bureau of Economic Research.

Filho, I. 2011. “28 months later: how inflation targeters outperformed their peers in the great recession.” The BE Journal of Macroeconomics, 11(1).

Gertler, M. 2005. “Comment on ‘Does Inflation Targeting Matter?’.” The Inflation Targeting Debate, 276–281.

Goncalves, C. E., and A. Carvalho. 2009. “Inflation targeting matters: evidence from OECD economies’ Sacrifice Ratios.” Journal of Money, Credit, and Banking, 41(1): 233–243.

Gregorio, J., A. Tokman, and R. Valdés. 2005. “Flexible exchange rate with inflation targeting in Chile: Experience and issues.” Working Paper, Inter-American Development Bank, Research Department.

Hayfield, T., and J. S. Racine. 2008. “Nonparametric econometrics: The np package.” Journal of Statistical Software, 27(5): 1–32.

Hirano, K., G. W. Imbens, and G. Ridder. 2003. “Efficient estimation of average treatment effects using the estimated propensity score.” Econometrica, 71(4): 1161–1189.

Ilzetzki, E., C. M. Reinhart, and K. S. Rogoff. 2008. “Exchange rate arrangements entering the 21st century: Which anchor will hold?” University of Maryland and Harvard University.

Johnson, D. R. 2002. “The effect of inflation targeting on the behavior of expected inflation: evidence from an 11 country panel.” Journal of Monetary Economics, 49(8): 1521–1538.

Klein, R. W., and R. H. Spady. 1993. “An efficient semiparametric estimator for binary response models.” Econometrica, 61: 387–421. Lin, S. 2010. “On the international effects of inflation targeting.” The Review of Economics and Statistics, 92(1): 195–199.

Lin, S., and H. Ye. 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.

Lin, S., and H. Ye. 2013. “Does Inflation Targeting Help Reduce Financial Dollarization?” Journal of Money, Credit and Banking, 45(7): 1253–1274.

Li, Q., and J. S. Racine. 2011. Nonparametric econometrics: Theory and practice. Princeton University Press.

Lucotte, Y. 2012. “Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation.” Economic Systems, 36(4): 609–628.

Minea, A., and R. Tapsoba. 2014. “Does inflation targeting improve fiscal discipline?” Journal of International Money and Finance, 40: 185–203.

Mishkin, F. S., and K. Schmidt-Hebbel. 2001. “One decade of inflation targeting in the world: What do we know and what do we need to know?” National Bureau of Economic Research.

Mishkin, F. S., and K. Schmidt-Hebbel. 2007. “Does inflation targeting make a difference?” National Bureau of Economic Research.

Mishkin, F. S., and M. A. Savastano. 2001. “Monetary policy strategies for Latin America.” Journal of Development Economics, 66(2): 415–444.

Morris, S., and H. S. Shin. 2002. “Social value of public information.” The American Economic Review, 92(5): 1521–1534.

Neumann, M. J., and J. von Hagen. 2002. “Does inflation targeting matter?” ZEI Working Paper.

Romer, D. 1993. “Openness and inflation: Theory and evidence.” Quarterly Journal of Economics, 108(4): 869–903.

Rose, A. K. 2007. “A stable international monetary system emerges: Inflation targeting is Bretton Woods, reversed.” Journal of International Money and Finance, 26(5): 663–681.

Rosenbaum, P. R., and D. B. Rubin. 1983. “The central role of the propensity score in observational studies for causal effects.” Biometrika, 70(1): 41–55.

Samarina, A., M. Terpstra, and J. De Haan. 2013. “Inflation targeting and inflation performance: a comparative analysis.” Applied Economics, 46(1): 41–56.

Song, K. 2014. “Semiparametric models with single-index nuisance parameters.” Journal of Econometrics, 178: 471–483.

Stone, C. J. 1980. “Optimal rates of convergence for nonparametric estimators.” The annals of Statistics, 8(6): 1348–1360.

Svensson, L. E. 1996. “Inflation forecast targeting: Implementing and monitoring inflation targets.” European Economic Review, 41(6): 1111–1146.

Svensson, L. E. 1999. “Inflation targeting as a monetary policy rule.” Journal of Monetary Economics, 43(3): 607–654.

Svensson, L. E. 2005a. “Optimal inflation targeting: Further developments of inflation targeting.” Sveriges Riksbank Conference,‘Inflation Targeting: Implementation, Communication, and Effectiveness’.

Svensson, L. E. 2005b. “Social value of public information: Morris and Shin (2002) is actually pro-transparency, not con.” National Bureau of Economic Research.

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

Woodford, M. 2005. “Central bank communication and policy effectiveness.” National Bureau of Economic Research.

Wu, T. Y. 2004. “Does inflation targeting reduce? inflation? An analysis for the OECD industrial countries.” Working Paper Series.

Zhao, Z. 2008. “Sensitivity of propensity score methods to the specifications.” Economics Letters, 98(3): 309–319.