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

Abstract

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.

Volatility Spillover Effects From Global and National Variables to Sovereign CDS Spreads: Evidence From Turkey

“…As a result of this intervention, domestic interest rates may be expected to increase due to the decrease in the amount of national money in the market. Consequently, the increase in interest rates may also lead to an increase in the country's risk premium (Blanchard, 2004;Başçı, Özel and Sarıkaya, 2007;Özatay, Özmen and Şahinbeyoğlu, 2009;Kadria and Aissa, 2016). The results of the Granger causality test conducted in this study also support this interpretation (national interest rate is the Granger cause of the sovereign CDS spreads).…”

“…There is a possible explanation for that: fear of floating. As a result of the intervention of the central bank to the market due to the fear of floating, an increase in interest rates is generally perceived as an upsurge in default risk due to a high debt burden, and thus leads to a rise in the risk premium (Blanchard, 2004;Başçı et al, 2007;Özatay et al, 2009;Hilscher and Nosbusch 2010;Kadria and Aissa, 2016). These findings are important for both government and domestic agents such as financial institutions, households, firms.…”

Assessing the Sustainability of Inflation Targeting: Evidence from EU Countries with Non-EURO Currencies

“…Different studies on the IT-financial stability nexus, such as references [18][19][20], point out the benefits brought by IT to reduce the sovereign debt risk especially in emerging markets. In addition, reference [21] shows the benefits of IT to pass into a more market-oriented financial system, reference [22] brings strong empirical evidence indicating that IT strategy exerts a positive effect on fiscal discipline, while reference [23] reveals that governments can gradually benefit from the adoption of IT in terms of reducing the public deficit and improve the taxation system in terms of tax revenue. Moreover, a positive but small effect of IT on business cycle is found in reference [24], the authors of which believe that business cycle synchronization depends on the monetary policy strategies adopted by the central bank.…”