Price Stability and Inflation Targeting in Commodity Economies: Macroeconomics versus a Political Economy?

Abstract

In this study, the author argues that maintaining price stability in commodity economies is influenced by their resource rent distribution and that economic stability is extremely sensitive to the nature of a political regime. The commodity factor alone is shown not to be an impediment to maintaining price stability and implementing inflation targeting. An empirical analysis based on data from 68 resource-rich countries provides evidence that the link between the timing of the implementation of inflation targeting and resource wealth variables is not skewed towards resource-poor countries. This study finds that among democracies, inflation targeters demonstrate the best price stability parameters, the most flexible exchange rates, more independent central banks, and more diversified economies, while among autocracies, the best parameters are seen in countries that have sovereign wealth funds.