Short- and Long-Run Differences in the Treatment Effects of Inflation Targeting on Developed and Developing Countries

Abstract

Allowing for time-varying treatment effects, this paper provides new findings on the effects of inflation targeting on economic performance over time. First, developed countries lower inflation and reach their targets rapidly in two years and developing countries reduce inflation gradually in that disinflation still continues moving to their long-run targets. Second, intertemporal tradeoffs occur for eight developed-country targeters. That is, targeting inflation significantly reduces inflation at the costs of higher inflation and growth variability and a lower output growth in the short-run, although no significant effects occur in the long-run. In contrast, no costs, only gains, emerge for thirteen developing-country targeters. Now, targeters achieve lower inflation following policy adoption as well as lower inflation and output growth variability in the short-run and long-run. Output growth catches up in a longer time horizon, although this effect is not significant. The paper discusses the interpretations of our empirical findings and the implications for monetary policy.