Do monetary, fiscal and financial institutions really matter for inflation targeting in emerging market economies?

Abstract

Most emerging market economies (EMEs) which have implemented inflation targeting have continued to miss inflation targets, even for countries with good institutions. This paper studies the importance of institutional quality such as central bank independence, fiscal discipline and financial sector development for the achievement of inflation targets in EMEs using a panel ordered logit model. It finds that the improvement in institutional quality reduces the probability of inflation target misses and that monetary policy is more effective in countries with good institutions. However, macroeconomic variables such as exchange rate gap, output gap and trade openness also explain inflation target outcomes.