Does inflation targeting make a difference in developing countries?

Lin, Shu; Ye, Haichun

doi:10.1016/j.jdeveco.2008.04.006

Cited by 260 publications

(205 citation statements)

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“…We retain here all emerging countries that have pursued an IT regime inthe treatment group. In fact, we are based on the sample used in Lin and Ye (2009) and we added at targeters Guatemala, Romania, Slovakia and Turkey that have adopted IT Table 1 (see appendix 1) shows the sample of countries selected for this study, as well as the respective adoption(s') dates for the ITers.…”

Section: Data and Stylized Factsmentioning

confidence: 99%

“…We estimate the propensity scores using a probit model 13 and the results of the probit estimates with time varying presented in Lin and Ye (2009). In addition, the explanatory power of the model is high, with an average pseudo-R 2 of McFadden equal to 75%.…”

Section: Intertemporal Estimation Of Propensity Scoresmentioning

confidence: 99%

“…Even more interesting, Alesina and Tabellini (1987), Obstfeld (1991), Jensen (1994), Van der Ploeg (1995), Van Arle et al (1995) and Minea et al (2011) agree on the fact that if the central bank decides to grant significant weight in its loss function to the price stability objective, it will reduce seigniorage revenue and compel the State to increase tax revenues through tax mobilization effort. Otherwise, valuable theoretical studies (see, e.g., Bernanke and Mishkin, 1997;Svensson, 1997;Bernanke et al, 1999) were motivated by the common finding in many empirical studies (see, e.g., Goncalves and Salles, 2008;Lin and Ye, 2009), for, the inflation targeting (thereafter IT) policy has helped emerging inflation targeters to have a significant improvement in macroeconomic performance which is mainly measured through the behavior of inflation, output and interest rates. But, this monetary strategy requiresa process of economic and institutional reforms which have a relatively large disciplining effect on the conduct of fiscal policy in avoiding seigniorage revenue and therefore opting for a tax mobilization/government expenditure rationalisation and public deficit reduction.…”

Section: Introductionmentioning

confidence: 99%

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Inflation targeting and public deficit in emerging countries: A time varying treatment effect approach

Kadria¹,

Aïssa²

2016

Economic Modelling

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Several studies including Minea, Tapsoba and Villieu (2012) and Lucotte (2012) claim that in emerging countries, the adoption of inflation targeting (IT) monetary policy and its discipline character allow intensifying their efforts to collect tax revenue and/or expenditure rationalization, and allows the reduction of their budget deficits (Kadria and Ben Aissa, 2014). But, the lag in the effect of monetary policy contains vital information for the policy evaluation (Fang and Miller, 2011). Hence, our contribution to the previous literature is then to evaluate the time varying treatment effect of the IT's adoption by emerging countries on their budgetary discipline in terms of reducing or mastering the public deficit. To do this, we used the propensity score matching approach in order to take account of this "lag effect" or from this effect throughout time. Our empirical analysis, conducted on a sample of 41 economies (20 IT and 21 non-IT economies) for the period from 1990 to 2010, shows that the lag in effect of IT on public deficit performance proves to be shorter and gradual for emerging countries that have adopted this monetary policy framework and our conclusions corroborate the literature disciplining effect of IT on fiscal policy.

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Section: Data and Stylized Factsmentioning

confidence: 99%

Section: Intertemporal Estimation Of Propensity Scoresmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Inflation targeting and public deficit in emerging countries: A time varying treatment effect approach

Kadria¹,

Aïssa²

2016

Economic Modelling

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“…Second, this choice can be explained by the relative benefits of this monetary policy framework on economic performances observed in industrialized and emerging economies that have adopted IT, and corroborated by a significant body of empirical literature. For instance, Lin and Ye (2009) find evidence for a large sample of developing and emerging countries that IT improves economic performance as measured by the level and variability inflation 3 .…”

Section: Introductionmentioning

confidence: 99%

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

Lucotte

2012

Economic Systems

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“…These studies are justified by their ability to generalize empirical findings and their policy implications appeal (Rutayisire, 2013 [2]). In fact, countries are heterogeneous (Lin and Ye, 2009 [34] and Espinosa et al 2010 [35]) and therefore, it is important to carry out country specific studies in order to relate findings to policy designs while allowing the incorporation of country specific characteristics (Rutayisire, 2013 [2]). Moreover, the current study is significant because even specific developing country studies suggest a wide range of inflation threshold levels ranging from 6 percent for Bangladesh (Ahmed and Mortaza ,2005 [29]) and India (Singh, 2010 [14]) to 22.2 percent for Ghana (Quartey , 2010 [27]).…”

Section: Introductionmentioning

confidence: 99%

Nonlinearities in Inflation and Growth Nexus: The Case of Tanzania<strong> </strong>

Epaphra¹

2016

Preprint

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Achieving high economic growth rate while maintaining low inflation rate, has become the main objective of monetary authorities all over the world. Indeed, empirical literature reflects that high inflation rates are detrimental to long run growth and entail welfare costs. To achieve this objective, central banks have availed different options from time to time which include inflation targeting. Monetary authorities in Tanzania have been targeting an inflation level of around 5 percent per annum for economic policy purposes. However, when high inflation is to be controlled, tight monetary policy is put in place which might in turn affect the economic activity. Also, the Tobin effect suggests that inflation causes individuals to substitute out of money and into interest earning assets, which leads to greater capital intensity which in turn promotes economic growth. Against these major points, this paper examines a non linear relationship between inflation and economic growth using both a quadratic and threshold endogenous models and attempts to identify the existence of threshold effects between these variables. The paper uses a data set spanning from 1967 to 2015. The most interesting finding of the estimations is that the estimated coefficient of the linear term of inflation is negative while the estimated coefficient of the square term of inflation is positive, suggesting a U-shaped effect as opposed to inverse or inverted U-shaped relationship found in other countries by previous studies. These results suggest that the Tobin effect may be valid for high inflation, in which people strongly realize the importance of substituting money for interest-bearing assets. This leads to an increase in capital investment, and in turn, an increase in economic growth even with high inflation rate. However, this U-shaped relationship between inflation and economic growth suggests that, the economy is better off at extremely low inflation episodes. The optimal inflation rate that ranges between 3.25 percent and 3.75 percent is obtained by minimizing the residual sum of squares and/or maximizing adjusted R-squared. These findings have some policy implications for the policymakers and development partners. The paper is consistent with policy suggestions by international agencies. Efforts to minimize inflation to a very low level are likely to have a positive effect on economic growth.

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Does inflation targeting make a difference in developing countries?

Cited by 260 publications

References 20 publications

Inflation targeting and public deficit in emerging countries: A time varying treatment effect approach

Inflation targeting and public deficit in emerging countries: A time varying treatment effect approach

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

Nonlinearities in Inflation and Growth Nexus: The Case of Tanzania<strong> </strong>

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