Global diffusion, policy flexibility, and inflation targeting

Abstract

ABSTRACT A diverse group of over 30 countries located all over the world—such as the UK, Colombia, and Ghana—introduced inflation targeting, which is a monetary policy that seeks to control inflation through a pre-announced target. Fully institutionalized democracies adopted the policy first because the core features of inflation targeting are consistent with the principles of a liberal democracy. But why was inflation targeting also introduced by less-democratic countries? This article develops the argument that decision makers of less-democratic countries became more likely to adopt inflation targeting when they observed that nearby countries increased the flexibility of the policy. The statistical analysis of data from 76 countries between 1989 and 2013 supports this hypothesis. The finding that the change of a policy toward a more flexible framework drives its global spread addresses a blind spot in the more recent policy diffusion literature.