Inflation Targeting and Economic Growth in Developed and Developing Countries: Evaluation of the Policy Effectiveness Using CS-ARDL Approach

Abstract

High inflation is one of the destabilizing factors for macroeconomic situation in a country since it decreases household income and enhances production costs. Some researchers note that rising prices lead to a decline in economic growth, therefore the monetary policy of the central banks in the world implements inflation targeting policy to achieve consistently low inflation. Despite the fact that a number of countries uses this policy regime, the scientific community continues debates about the effectiveness of the inflation targeting. In particular, it is still not obvious whether inflation targeting policies promote economic growth in the countries implementing them or, on the contrary, lead to economic slowdown. The purpose of the study is to assess the impact of the inflation targeting regime implementation on the economic growth in developed and developing countries and estimate the effectiveness of such policies. The hypothesis of the study assumes that the inflation targeting policy stimulates economic growth, however, its effectiveness is greater for developing countries than for developed ones. For econometric modeling, we use time-series panel data for 63 countries ranged 1980–2021. Given the length of the period and cross-sectional dependency, we apply the Cross-Section Augmented Auto-regressive Distributed Lags (CS-ARDL) approach. The results of the study demonstrate a positive impact of inflation targeting on economic growth. Moreover, we document that implementation of this policy spurs economic growth in the developing countries, while no such effect is observed for developed economies. The study fills the gap in the existing literature on the inflation targeting effectiveness analysis and points the need for choosing different instruments to address inflation in developed countries. The practical significance of the study lies in the fact that the results obtained confirm the effectiveness of inflation targeting for developing countries and its absence for developed countries.