Inflation targeting in low‐income countries: Does IT work?

Atsuyoshi Morozumi,Michael Bleaney,Zakari Mumuni

doi:10.1111/rode.12690

Atsuyoshi Morozumi, Michael Bleaney + Show 1 more

Open Access

https://doi.org/10.1111/rode.12690

Copy DOI

Abstract

AbstractPrevious research on inflation targeting (IT) has focused on high‐income countries and emerging market economies (EMEs). Only recently have sufficient data accumulated for the performance of IT in low‐income countries (LICs) to be assessed. We show that IT has not so far been as effective in reducing inflation in LICs as in EMEs. Relatively low central banks’ instrument independence in LICs, associated with weak restrictions limiting a central bank’s lending to the government, helps explain this result.

Highlights

Inflation targeting (IT) was first adopted in 1990 by New Zealand, followed by a number of other high-income countries (HICs) and emerging market economies (EMEs)
First we examine how the effectiveness of IT differs across income levels, between low-income countries (LICs) and EMEs
The standard result in previous research is that inflation targeting has made little difference to the inflation rate in the advanced countries, but has significantly reduced inflation in non-advanced countries

Summary

Introduction

Inflation targeting (IT) was first adopted in 1990 by New Zealand, followed by a number of other high-income countries (HICs) and emerging market economies (EMEs). Existing empirical studies suggest that IT has significantly reduced inflation in EMEs but has made little difference in HICs (see Walsh (2009) for a useful survey).. In the 21st century have low-income countries (LICs) begun to adopt IT as a new monetary policy framework to pursue low inflation. IT in LICs may differ from that in EMEs, an income group where IT is known to be generally effective in reducing inflation. Within a pooled sample of LICs and EMEs, when independence is low because of weak restrictions limiting a central bank’s lending to the government, IT loses its effectiveness in reducing inflation rates. We re-categorize the four groups into three by combining the bottom two groups, which yields our final classification of HICs, EMEs, and LICs. | 1531

Objectives

Methods

Results

Conclusion