Credibility in Emerging Economies: Does Inflation Targeting Matter?*

Abstract

In this paper we evaluate the role of inflation targeting (IT) in enhancing monetary policy credibility in emerging economies. We construct a timevarying credibility index, and then carry out extensive testing in order to assess whether IT had a significant impact on monetary policy credibility. Our results confirm that credibility was on average lower for targeters than non-targeters before the regime change, and show that the gap was closed after the adoption of IT. However, taking mean reversion into account, we find no significant evidence that IT bolstered credibility levels.

Does the Global Financial Crisis Matter for the Macro Economic Performance of Inflation Targeting in Advanced and Developing Countries?: A Panel Study

“…As previously mentioned, some authors have attributed this finding on the Great Moderation period to the coinciding of the widespread adoption of IT with a period of historically low inflation and output volatility (Ball and Sheridan, 2005, pp.249-282;Dueker and Fischer, 2006, pp.431-450;Willard, 2011Willard, , pp.2231Willard, -2244. In addition to these results, there were no differences between IT and non-IT countries in terms of lower inflation rates, well-anchored and accurate inflation expectations and there was no significant evidence that IT bolstered credibility (Angeriz and Arestis, 2008, pp.293-317;Lanzafame and Nogueira Jr., 2011, pp.1080-1098. Contrarily, some authors have shown that output volatility has not changed or worsened after the adoption of IT and IT countries suffered smaller output losses during disinflations when compared to non-IT countries (Arestis et al, 2002, pp.528-545;Goncalves and Carvalho, 2009, pp.233-243).…”