Inflation targeting and fiscal discipline in selected emerging economies

Abstract

We examine the fiscal performance resulting from adopting an inflation targeting (IT) policy in emerging market economies from Europe and Central Asia for the period 1997-2019. The significant links between IT policy and fiscal variables are found to be limited. According to the dynamic panel model, IT improves the cyclically adjusted overall and primary fiscal balance in the period 1997-2019, whereas it has been improving the overall and primary fiscal balance since 2008. The application of propensity score matching has shown that the introduction of IT affects the reduction of the public debt-to-gross domestic product (GDP) ratio, but it is not certain that this result reflects a causal link. Contrary to successful monetary performances of IT policy in many emerging economies, more coordination between fiscal and monetary policy seems to be needed for this policy to be effective beyond the monetary sector.