Does inflation targeting (IT) affect the macroeconomic performance of countries?

Thumbnail Image
Journal Title
Journal ISSN
Volume Title
In recent years there has been an increase of countries that have adapted inflation targeting (IT) regimes. At the same time IT countries shifted from the traditional IT regime to a more flexible one. Previous literature has not come to a conclusive answer to the question if IT regimes were truly better at targeting inflation than other monetary frameworks. This thesis attempts to answer whether IT regimes positively influence the macroeconomic performance of countries by comparing IT and NIT countries. Furthermore this thesis will look how the flexible and traditional IT regimes performed compared to the NIT countries. The main macroeconomic variables that are used are inflation (core and headline), output growth, and interest rates. The difference in difference method is used to answer these questions for the time period of 1983-2008. The analysis shows that the differences in performance are not caused by the implementation of IT regimes, but are caused by transition factors. The results further suggest that strict regimes are better at targeting (headline) inflation than the flexible regimes. The results for the other macroeconomic indicators suggest that IT regimes do not have any influence. In conclusion, only strict regimes are able to significantly lower (headline) inflation. Keywords: Monetary Framework, Inflation Targeting, Macroeconomic Performance
Faculteit der Managementwetenschappen