Abstract
This paper investigates whether institutional quality determines the effect of inflation targeting (IT) on the banking risk of Islamic versus conventional banks, using an unbalanced panel data over...
Highlights
Since the early 90s, inflation targeting (IT) has become the most suitable strategy for fighting inflationary pressures and ensuring the proper conduct of monetary and exchange rate policies
Our results show that imple menting an IT system in an economic environment characterized by the spread of cor ruption and government inefficiency can destroy the stability of the banking system
The positive aspects of these characteristics became evident during the last financial crisis of 2008
Summary
Since the early 90s, IT has become the most suitable strategy for fighting inflationary pressures and ensuring the proper conduct of monetary and exchange rate policies. Using bank-level data from 66 countries over the 1998/2014 period, the authors showed that IT is found to have a stabilizing effect, especially for banks operating in countries where institutions are perceived to have average levels of quality Within this context, Fouejieu (2017) investigated whether in the emerging markets inflation targeters are more financially vulnerable than their non-targeting peers. Based on a sample of 26 emerging countries including 13 targeters, the author stated that the monetary policy in these targeting countries is relatively more sensitive to financial risks while Fazio et al (2015) compared the risk-taking behavior of banks in IT countries to that of their counterparts from non-IT countries Their results revealed that banks operating in IT countries have an enhanced stability, which enables them protect themselves during global liquidity shortages Periods. The impact of financial openness on banks’ risk-taking behavior depends on the development of institutions
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